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eibfs ﻣﻌﻬﺪ اﻹﻣﺎرات ﻟﻠﺪراﺳﺎت اﻟﻤﺼﺮﻓﻴﺔ واﻟﻤﺎﻟﻴﺔ Emirates Institute for Banking and Financial Studies IJRBF INTERNATIONAL JOURNAL OF RESEARCH IN BANKING AND FINANCE VOLUME 1 ISSUE 2 DECEMBER 2016 Research and Studies Department Dubai, 2016 EDITORIAL BOARD MANAGING EDITOR Dr Constantine Andoniou, EIBFS, UAE ASSOCIATE EDITORS Dr Ajit Kumar Pandey, Royal University of Bhutan, Bhutan Dr Ali Bhayani, University of Wollongong in Dubai, UAE Dr Ashok Dubey, EIBFS, UAE Dr Athena Vongalis-Macrow, Deakin University, Australia Dr Haitham Nobanee, Abu Dhabi University, UAE Dr Harendra Kumar, Amity University, India Dr Haris Lambropoulos, University of Patras, Greece Dr Khalid Zarooq, EIBFS, UAE Dr Mohammad Omar Farooq, University of Bahrain, Kingdom of Bahrain Dr Mohammed Ali Akour, A'Sharqiyah University, Oman Dr Paul Gibbons, Daniels College of Business, USA Dr Philip Hamill, EIBFS, UAE Dr Welcome Sibanda, Heriot-Watt University, UAE Jim Grasell, Higher Colleges of Technology, UAE Neville Edwards, W.E Henley F.Z.E, UAE ISSN 2518-6671 © 2016 Emirates Institute for Banking and Financial Studies Research and Studies Department, Dubai, UAE All rights reserved. Copyright of all articles published in the International Journal of Research in Banking and Finance (IJRBF) belongs to their respective authors. Site users are permitted to download and print the articles for personal use. Further reproduction and/or distribution is not permitted, except for brief excerpts or quotations intended for inclusion in some other original works. In this case, proper attribution must be made to the author/copyright holder, and the place of publication must be acknowledged. Under this copyright notice, altering, editing or otherwise modifying the content of information obtained from the International Journal of Research in Banking and Finance (IJRBF) is not permitted without the written permission of the publisher. Research and Studies Department, Dubai, UAE Dubai International Academic City, Al Ruwayyah 2 PO Box 341400, Dubai, UAE T: +971 4 6070444 (ext.420) E: [email protected] CONTENTS _____ The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Downturn Lekshmi Vijayan Key Risk Indicators (KRIs) for the United Arab Emirates Banking Sector Sowmya Vivek The Role of e-Wallets in Financial Inclusion in Emerging Economies: an Indian Perspective Amit Kumar Sinha & Sonia Singh The Impact of e-Banking on Banks Profitability Muhamad Jumaa The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown Lekshmi Vijayan Abstract The economic escalation of United Arab Emirates for some decades is undoubtedly spectacular with its enormous technological advancement and stunning infrastructure and facility management. Yet the contemporary global economic state of affairs hypothesizes the urgency of stringent premeditated economic moves which are absolutely embedded in sustainable development. While the U.A.E. is through some appreciable moves based on sustainable development this research paper, based on published data, intends to bring some contributions in listing out the prospects of sustainable development in different sectors. Keywords global financial downturn, sustainable development, sustainability, economy, U.A.E. 1 Introduction The world, after witnessing a steady progress for about a five years yet again exhibits a sliding fiscal system from 2014; the United Nations (2016) anticipate a growth in world economy of 2.9 per cent in 2016 and 3.2 per cent in 2017. Conversely, the Global Economic Conditions Survey (ACCA & IMA, 2016) showed that in the first quarter of 2016 the businesses were less optimistic about their prospects than at any other time in the past four years. Since the world economy is inextricably unified across the national borders, where the higher level of international integration is just like a double-edged weapon with massive benefits in information exchange, communication, economic growth, and international trade accompanied by the concomitant negative environmental and social impacts, the effects of which are extended over international boundaries (Abeygunawardena, et al., 2005). The downward trend in the oil price has had a direct or indirect adverse impact on the interdependent economies in Gulf Cooperation Council (GCC) nations and other developing economies. At the same time the GCC nations, especially the U.A.E., with the surplus capital reserves can successfully take the advantage on their strength by allocating the resources on a sustainable economic portfolio. Since the Gulf wealth is inextricably linked with the finite energy resources, it is the high time to reinforce the development based on sustainability. 2 Objectives of the Study • • To explore the current scenario of economic growth in the U.A.E. To implicate the span of sustainable development in the U.A.E. 1 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown 3 Literature Review 3.1 Global Financial Downturn Financial downturn is the result of fiscal crisis. The economic crises often result from sudden declines in private demand and capital inflows which disrupt the financial intermediation, accompanied by sharp declines of financial assets and resources and the failure of many financial and non-financial firms (World Bank Group, 2012). The root cause of the financial meltdown is the economic imbalances resulting from inefficient and unequal income distribution and dysfunctional financial system. The global economy has been slowed down since the political, social and fiscal insecurity reins the world. The challenges are increased by the global inflation and the lower oil price. The financial downturn of the developed nations will pull down the rest of the world economy. The International Monetary Fund (2016) in the World Economic Outlook indicated three key shifts persisting in the global economy: ‘the gradual slowdown and rebalancing of economic activity in China, away from investment and manufacturing toward consumption and services, lower prices for energy and other commodities, and a gradual tightening in monetary policy in the United States in the context of a resilient U.S.A. recovery as several other major advanced economy central banks continue to ease monetary policy’. The International Monetary Fund economists forecasted a slower and trimmed economic growth throughout for all nations including the U.S.A. The Federal Reserve hike in the U.S.A. interest rates and the prospect of even higher rates have caused capital to flow out of emerging markets and into dollar-based assets. The recession tears down the growth in Europe, hit badly by the low investment and high unemployment rates. Japan, the world’s third largest economy has slipped into technical recession rooted in the risk of deflation caused by the decline in the real gross domestic product (GDP). China renowned as ‘the factory of world’ experiencing a fiscal deficit in turbulence is a massive shake to the global economy. China’s property and equity bubbles, industrial overcapacity, constricting manufacturing sector, impractical infrastructure development and the massive nonperforming debts, pull down the economy. The tampered growth of Chinese economy directed to the lesser demand of commodity in turn show the way to a crash in commodity price. The Latin American economy melts down in the lowest commodity prices, despite having the largest oil reserves in the world; Brazil, Venezuela, Nigeria, Algeria and Ecuador dropped the production, facing broadened fiscal and current account deficits. Lowest commodity prices, depreciating currency value, micro- and macro-economic and political instability exist in nations in contrast to the strengthening U.S.A. policy reforms constricting the situation. The drop in the oil price triggered the pace of contraction in Russia and OPEC nations, with Russia facing deep recession than the affluent OPEC members. The price drop hit the oil exporters badly, who are heavily dependent on oil revenue and the mining industry, while consumer nations like Japan, China and India would be able to ease the activities in lesser import cost. The controlled supply-demand management of the oil production in the past is overwhelmed by the ease of availability of crude oil in the current market. The U.S.A. based shale 2 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown oil production and accelerated production in Iran and Saudi Arabia, eventually resulted in lower commodity price. Simultaneously, the Gulf Cooperation Council (GCC) producers such as Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar have amassed considerable wealth during the past decade through cash reserves and sovereign wealth funds. But even these countries could come under stress in the next decade if they continue to follow their status quo (Hartmann & Sam, 2016). Besides the number of interrelated reasons in world nations the bursting of the housing bubble causing a reallocation of capital and a loss of household wealth and drop in consumption, a sharp rise in the equity risk premium (the risk premium of equities over bonds) causing the cost of capital to rise, private investment to fall and demand for durable goods to collapse and a reappraisal of risk by households causing them to discount their future labor income and increase savings and decrease consumption, deepened the shock of global crisis. 3.2 Sustainable Development According to Rogers, Jalal, & Boyd (2008) sustainability is the term chosen to link the gap between development and environment. Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs. The term sustainable development has gained wide acceptance since 1980, being described as the integration of the development of sectors across borders and between generations. In terms of sustainable development, three mutually reinforcing core pillars need to be incorporated: society, economy and environment. Social sustainability encompasses ideas of equity, empowerment, accessibility, participation, sharing, cultural identity, and institutional stability. It seeks to preserve the environment through economic growth and the alleviation of poverty. Economic sustainability implies a system of production that satisfies present consumption levels without compromising future needs. The economic growth would bring the technological capacity to replenish natural resources destroyed in the production process (Basiago, 1999). According to the Ohio Environmental Protection Agency (n.d.), sustainable business practices include a wide range of activities that conserve nature by using renewable sources like solar, wind, geothermal and bio-fuel resources to reduce or eliminate its dependence on finite resources. This means designing products that reduce waste and are recyclable, as well as buying materials that are recycled from other sources. Sustainability also includes designing closed-loop systems both within and external to the production process. The principles of sustainability apply to all aspects of business from construction, to development, to production. Sustainability issues have long been associated with conservation of resources and protecting the environment with sustainable practices by increasing long-term efficiency and long-term security. Sustainable business practices can guarantee that a business will be here for many years to come. Sustainability is not only good public relations, it is also sound business sense and can generate revenue. According to Basiago (1999) environmental sustainability necessitates preservation of the natural capital as a source of economic inputs and as an absorber of economic outputs called wastes. 3 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown Resources must be harvested no faster than they can be regenerated. Wastes must be emitted no faster than they can be assimilated by the environment. It involves ecosystem integrity with indigenous resource planning and management, develop and circulate eco-principles and green products, legal moves against environmental degradation, identify the carrying capacity by estimating the social and cultural opportunity and constraints and biodiversity. The prevention of pollution and the proper treatment and recycling of waste payoff in sustainability. Accordingly, sustainable development is a conceptual framework to change the world view to a more holistic and balanced approach, it is a process of applying principles of integration in decision making across space and time, it is an end goal in identifying and fixing the problems concerned with resource depletion, health care, social exclusion, poverty, unemployment, and so on. The growth in terms of mere GDP is an insignificant and short term growth in terms of sustainability since short term wealth is accumulated at the expense of long term well-being and survival and hence it is not a meaningful growth (Strange & Bayley, 2008). The Organization for Economic Cooperation and Development (OECD) emphasized that sustainable development can only be achieved through long-term investments in economic, human and environmental capital (OECD, 2008). Several countries in the GCC face energy shortages, primarily due to abundant gas consumption, and besides the pollution from heavy industry and large-scale desalination of seawater have adverse effects on the local environment, threatening the health condition of the citizens (Smeets & Bayar, 2012). China, in the period of exceptional economic growth and transition, has been facing threatening pollution crisis with thousands of chemicals and gases that are irritants, carcinogens (BBC News, 2016). Hence there is an urgency in pinpointing the development oriented in sustainability. 4 The U.A.E. Economy The United Arab Emirates (U.A.E.), a Constitutional Federation of seven emirates (Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah), has astonished the world with its affluent economy through the most spectacular development all-around. The rich heritage tagged with the world-class infrastructure and well diversified economy put together the nation stand-alone globally. According to the U.A.E. Ministry of Finance (2016), the U.A.E. accomplished an esteemed level of global competency and fitness among global toppers in the World Competitive Ranking Index. ‘The U.A.E. has joined the list of the best 15 economies in the world, and was ranked amongst the best 20 countries according to the Global Competitiveness Report 2014/15, issued by the World Economic Forum. In 9 out of 12 global reports of competitiveness issued by international institutions, the U.A.E. was ranked 12 in 2014/15, having been ranked 19 a year previously.’ U.A.E. enjoys the glory of first rank globally for quality of its roads, the absence of organised crime and having one of the lowest levels of inflation; it stands second in terms of FDI, third globally with regard to public trust in politicians and leaders, government procurement of advanced technology products, infrastructure of air transport, and fourth globally in terms of market efficiency. With respect to the Ease of Doing Business Index, the World Bank report 2014/15 rated U.A.E. among the top 10 countries that made improvements in the area of Ease of Doing 4 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown Business: ‘The World Bank Report that measures the performance of 189 countries in the field of doing business has shown that the U.A.E. has maintained, for the third consecutive year, the first rank among Arab countries, and advanced one position in the overall ranking to 31st globally.’ In the Innovation Index the U.A.E. was ranked first in Arab countries and 36 globally in the Overall Innovation Performance, according to the Global Innovation index 2014, issued by Cornell University, INSEAD Institute- the leading international business school, and the World Intellectual Property Organisation (WIPO) of the United Nations. On the subject of Happiness, the U.A.E. was ranked first among Arab countries, and 14 globally according to the UN report on people's happiness and satisfaction index 2013, moving up from 17th place in 2012. The GDP growth rate is one of the most important indicators of economic health of a nation, which measures the pace of economic growth of a nation. When comparing the GDP growth rate of U.A.E. with that of the World, it is obvious (Figure 1) that both are heading towards a sluggish financial situation, where U.A.E. had 4.6% growth in 2014 came down to 3.2% in 2015. More to the point, the World Bank revised the economic growth forecast down to 2.4 percent from the 2.9 percent pace projected in January in terms of the downgrading global growth ‘due to sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows’ (The World Bank, 2016). The comprehensive world economic GDP growth rate forecast of the year 2017 and 2018 furnish a positive outlook of 2.8% and 3% correspondingly. GDP Growth Rate UAE GDP Growth Rate World 12.0% 10.0% 8.0% Axis Title 6.0% 4.0% 2.0% 0.0% -2.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -4.0% -6.0% Figure 1: GDP Growth Rate - World/U.A.E. comparison (Source: Computed from World Bank Database) 5 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown According to the Meed Insight Dubai Expo 2020 Projects Report (2014), the Expo 2020 will lift up the non-oil segment like travel, tourism and transport sectors, with a projected growth up to 10 percent every year: ‘The oil sector has been particularly vital to the U.A.E. economy over the past three years, as non-oil GDP struggled to recover from the 2009 global recession and debt crisis. But with volatility in global oil prices and Abu Dhabi’s oil production set to slow, the government is accelerating its long-term drive to diversify the economy. Based on current oil production levels, Abu Dhabi’s oil reserves will continue to be productive for another 90 years. But weaning the U.A.E. economy off its dependence on energy exports is also intended to help the country become self-sustainable by the time it runs out of oil’. The comprehensive vision of the U.A.E. has been laid on sustainability and visualized the economic independence from the nonrenewable energy sources. Yet the considerable drop in oil price may aid to slowdown the growth, still relatively lower than other OPEC nations and higher than the world total GDP growth rate (Figure 1). The downturn in China, being the significant trade partner, adversely has affected the oil exports, in turn has jeopardised the investment in infrastructure development, tourism and global trade. As published by The World Bank, the U.A.E. produces 3 million b/d of crude oil, but government revenues have been falling continuously from 41% of GDP in 2013 to about 29% of GDP in 2015, still the government expenditures had risen 30% of GDP in 2013 to 34% of GDP in 2015, consequently, the surplus of about 10.4% of GDP in 2013 has turned into a fiscal deficit of an estimated 5.2% of GDP in 2016. The government has been investing its oil surpluses into the non-oil economy, in particular, to develop the Dubai financial and real-estate centers, international airline hubs in Dubai and Abu Dhabi, and sports-tourism in a number of Emirates as well as light manufacturing and transport and retail trade services. ‘Though reserves stand at comfortable levels to cushion the impact of low oil prices, the U.A.E. government is keen to raise non-oil revenues by implementing a VAT at the latest by 2018, in conjunction with other members of the Gulf Cooperation Council. It is also considering the introduction of a corporate tax. However, additional measures will be needed including a reduction in electricity and water subsidies and a gradual slowdown in the implementation of Government Related Entities (GRE’s) mega-projects’ (The World Bank, 2016). 5 Prospects of Sustainable Development the U.A.E. The expedition of U.A.E. towards sustainability has started years back and remarkable movements are held ahead towards sustainable development. Sustainability administers to a slow and steady hike in the wealth of nation by appreciating the economic scope, human capital and health and by shielding the value of nature and natural resources, by integrating the growth of society, economy and environment. UNESCO aims at a world with ‘no poverty, zero hunger, good health and well-being, quality education, gender equality, clean water and sanitation, affordable and clean energy, decent work and economic growth, industry innovation and infrastructure, reduced inequalities, sustainable cities and communities, responsible consumption and production, climate action, life below water, life on land, peace justice and strong institutions and partnership for the goals’. Based on the sustainability related literature review and the 17 goals of UNESCO to transform world towards sustainability some policy implications are discussed below for the notice of public and decision makers (UNESCO, 2015). 6 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown 5.1 Sustainable Society A sustainable society is a society that meets the needs of the present generation which does not compromise the ability of future generations to meet their own needs, in which each human being has the opportunity to develop itself in freedom, within a well-balanced society and in harmony with its surroundings. The U.A.E. government is big-hearted and open-handed to provide several supporting aids to all of its citizens by providing huge subsidies, social assistance for lower income and greater concern towards disadvantaged including widows, disabled and elderly. The World Happiness Report ranked the U.A.E. as the 17th in the world and the first among the Arab countries, has already marked its presence of citizens’ well-being and happiness. The Emirates have already come up with a greatest vision of 2021 with United in Responsibility, United in Destiny, United in Knowledge and United in Prosperity. According to UNESCO (2015) ‘while the concept of sustainable development is now familiar in institutional, academic and specialized milieus, it still needs to be spread at the grass-roots level. All sectors of society must be targeted, from business people to children in the most remote areas’. Education Women Empowerment SOCIETY Health Human Capital FDI Inflow Export Acceleration ECONOMY SUSTAINABILITY Service Sector Research in Biodiesel Convertible Natural Energy ENVIRONMENT Zero Waste Technology Rain Water Harvesting Figure 2: Prospects of Sustainable Development in the U.A.E. 7 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown 5.1.1 Quality Education System The nation has incredible infrastructure, facility and legal system with regard to the educational sector, yet more importance is given to the quality outcome, with diversified streams in higher education. According to the statistics of the U.A.E. Ministry of Higher Education & Scientific Research (2015) among those who have enrolled for higher education 60.3% are nationals and the other 39.7% are expatriates from 160 countries (Figure3). Percentage 60.33 7.04 21.10 1.07 UAE Nationals GCC Other Arabs Europeans Nationals 1.22 0.11 North Americans 2.20 6.39 0.13 Latin American and Caribbean Nationals Non-Arab Africans Non-Arab Asians countries of Oceania 0.40 Others Figure 3: 2014 U.A.E. Student Enrollment for Higher Education (Source: Computed from the database of the U.A.E. Ministry of Higher Education & Scientific Research) From the published data of the U.A.E. Ministry of Higher Education & Scientific Research (2015) there are no or few doctoral programs running on arts and design, foreign languages, environment and health science, medical science, mass communication, other sciences and agriculture (Figure 4). Where academic research is the stepping stone for the crucial economic and social development of society since it can add on to the rapid growth of scientific knowledge. Moreover the education system should encourage and provide facilities with meagre start-up cost for student entrepreneurs. The school and college curriculum should highlight to nurture the culture of conserving and love environment just as United States implemented it. The need and importance of sustainability should be properly communicated among students since they are the future generation to uphold the nature towards sustainability by reducing energy use and related emissions of greenhouse gases, use of environmentally friendly products and the efficacy of protecting the bio-diversity. 8 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % Enrolled for Doctorate % Enrolled for Master’s Figure 4: Student Distribution in Higher Level of Study (Source: Computed from the database of the U.A.E. Ministry of Higher Education & Scientific Research) The education system in the U.A.E. can be enhanced with more intensive research in order to attract more expatriates in pursuing different careers, and thereby making the U.A.E. a knowledge hub in the future. So with a totting up of technical, scientific and industry oriented education system upheld with a greater importance for student innovation and research in U.A.E. can definitely cause an impact. 5.1.2 R& D in Health As per the statistics of the World Bank (2016), the U.A.E. has increased the health expenditure from 2.48% of GDP in 2001 to 3.64% of GDP in the year 2014 (as shown in Figure 5), yet the greatest challenges are the demand-supply gap as well as the government policies and regulations faced by U.A.E. health sector. According to U.S.–U.A.E. Business Council (2014) the Abu Dhabi 2030 plan specifically states that ‘the Emirate has still to develop capabilities in key areas; specifically by enhancing intellectual property rights, revising international trade agreements, establishing a reliable drug testing and approval system, developing investment attraction mechanisms and marketing and distribution capabilities … the growth of a dynamic pharmaceuticals segment will go hand-in-hand with the development of a world-class healthcare system, with the development of each sector reinforcing the other.’ The licensing certification of the doctors, inadequate healthcare education and training and slow pace of medical research and infrastructure development are also brought into being as challenges. The research in medicine, health and pharmacy has enormous opportunity in U.A.E., although the nation has stepped into remarkable advancement in the field. 9 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Health Expenditure (% of GDP) 2.48% 2.72% 2.65% 2.46% 2.32% 2.33% 2.57% 2.93% 4.05% 3.93% 3.70% 3.45% 3.49% 3.64% Figure 5: Health Expenditure (% of GDP) (Source: Computed from the database of the U.A.E. Ministry of Higher Education & Scientific Research) 5.1.3 Women Empowerment ‘At present, the female half of the world’s human capital is undervalued and underutilized the world over. As a group, women – and their potential contributions to economic advances, social progress and environmental protection – have been marginalized. Better use of the world’s female population could increase economic growth, reduce poverty, enhance societal wellbeing, and help ensure sustainable development in all countries. Closing the gender gap depends on enlightened government policies which take gender dimensions into account’ (OECD, 2008). In the current arena there is a greatest significance for the quote of Brigham Young, the great visionary and philosopher, ‘You educate a man; you educate a man. You educate a woman; you educate a generation.’ The U.A.E. has already initiated strategies to empower women based on their skills and to set up enterprises leading by women entrepreneurs with the assistance of Dubai Business Women Council. Thereby elevating the role of women in the field of decision making, medical research, academic research, science and technology will positively helpful to escalate the economy of nation. 5.1.4 Human Capital Human capital is the totality of the skills, knowledge, and experience possessed by an individual or population of a nation, which ultimately brings out the economic value of the nation. Several empirical research studies proved the contribution of human capital to individual development and national economy growth. Still, the concept of human capital needs to be expanded toward ‘human development’ with one’s wellbeing on health, knowledge, and standard living (Kwon, 2009). According to the International Labour Organization (2011), with the distribution of productive and quality employment opportunities boost to rebalance the economy towards a 10 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown broader-based growth, is crucial to compensate for falling exports to developed countries. Many nations advocate massive job layoffs in global crisis, but they may fail to cater the greater domestic demand and ultimately lead to social concerns. So the wage-led strategy which is referred as ‘automatic stabilizer of the economy’ is underlined by various research studies in the spectrum of sustainable development. The U.A.E. has already put forward the ground-breaking thoughts on developing the substantial range of productive human capital. 5.2 Sustainable Economy A sustainable economy ensures maximum productivity along with a slow and steady economic development and society development, no more than that a healthy nation will be. According to the Aviva Investors-Forum for the Future (2011) ‘a resilient, sustainable economy that maximizes quality of life for all, so that people can develop their full potential and lead productive, creative lives within environmental limits’, so that to create a resilient, stable and sustainable economy by investing wisely and using power to shape the development of capital markets. 5.2.1 Foreign Direct Investment The World Bank states ‘Foreign direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy. As well as the equity that gives rise to control or influence, direct investment also includes investment associated with that relationship, including investment in indirectly influenced or controlled enterprises, investment in fellow enterprises (enterprises controlled by the same direct investor), debt (except selected debt), and reverse investment’. FDI INFLOW FDI OUTFLOW 18000 16000 Millions of Dollars 14000 12000 10000 8000 6000 4000 2000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Figure 6: FDI Flows (Source: Computed from UNCTAD, FDI/MNE database) 11 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown The outward flows stand for the investments in a foreign economy by the purchase of equity or reinvestment of earnings and the inward flows represent the investments made by foreign investors in a reporting economy; in fact FDI creates stable and long-lasting links between economies. The FDI flows of U.A.E. (Figure 6) reflect a healthy influx of FDI to the tourism, recreation, infrastructure, logistics, real estate and renewable energy sector than in hydrocarbons; which will consecutively increase the sustained foreign exchange reserve, with the improved investment climate. According to the U.A.E. Ministry of Economy (2015) ‘it is prospected that the U.A.E., during 2015 and 2016, shall benefit from its position of being attractive for foreign direct investments, with the approach of the adoption of foreign direct investment law, which allows full foreign ownership of projects in the strategic areas which priority shall be defined by the government, together with the ongoing preparations to host the activities of the 2020 World Expo in Dubai, the continued high government spending and the private consumer spending, and that the international standing of the country shall be enhanced in attracting foreign direct investment in many economic sectors, especially tourism, construction and building, real estate, the financial sector and supporting the levels of productivity and competitiveness.’ The government investment plays pivotal role in U.A.E., both at federal and local levels, the further relaxed government policies would attract the direct investment in production sector facilitates the foreign investment with upgraded technology. By implementing best international financial regulations, the nation can reduce the domestic production cost to cater the population with best quality products. The further promotion of entrepreneurship with subsidized licensing fee and initial investment will promote the economy with well diversified prospective portfolio. The more foreign direct investment, the more business start-ups and the more strengthen the economy with lower financial risk. 5.2.2 Export Acceleration The U.A.E., the 26th largest export economy, operates as a prime spot for international trade causing its geographical existence with major seaports, free zones, positive government regulations and tax-free environment made it as a world export cum trade centre. In international trading, exports stand for the outbound trade and transfer of domestic goods to a foreign country; re-export is the export of foreign goods to a foreign nation which are already imported to the country from same or another foreign country. The chief re-exports are pearls, precious stones, precious metals and their products, audio and video recording and broadcasting machines, transport equipment, textile materials, normal metals, plastics, rubber and their products, food products, soft drinks, alcoholic drinks and tobacco, plant products and products of chemical industries and their related industries. 12 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown 2015 2014 2013 2012 2011 0.0 200.0 400.0 600.0 800.0 1,000.0 1,200.0 1,400.0 2011 2012 2013 2014 2015 1,109.3 1,283.5 1,374.3 1,361.3 1,224.3 Re Exports 439.1 488.7 516.7 538.8 540.3 Total Exports of Non-Hydrocarbon 260.3 354.2 382.4 412.8 450 Total Exports of Hydrocarbon 409.9 440.6 475.2 409.7 234 Total Exports & Re Exports (FOB) Figure 7: Exports Breakdown of U.A.E. (in Billion AED) (Source: Computed from National Bureau of Statistics) Though the OPEC nations were facing low oil price crisis, the exports of the U.A.E. have not been defectively affected (Figure 7) in 2015 since there is a greater difference in export of nonhydrocarbon and re-exports; at the same time the Emirates recorded a trade surplus of 55.3 Bn AED in 2015 (Figure 8) where it was only 34 Bn AED in 2014 and in 2001 it had a deficit of -16.6 Bn AED. This slow and steady sustainable growth will unquestionably support the sustainable economy, so the nation can maximize its utilization of resources sustainably at this course as a global logistics hub. 80 70 60 50 40 30 20 10 0 -10 -20 -30 Overall Balance (BOP in Bn AED) 2,011 2,012 2,013 2,014 2,015 -16.6 36.3 73.1 34.0 55.3 Figure 8: Overall Balance of Payment of U.A.E. (in Billion AED) (Source: Central Bank of U.A.E.) 13 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown 5.2.3 Service Sector The U.A.E. has already marked its positioning as one of world’s favourite tourism spots as well as one of the best shopping destinations. As evident in Figure 8, there is a significant direct and indirect impact of tourism on the GDP and Employment in the U.A.E. where in 2009 the contribution to GDP is 81.5 Bn AED and the total contribution to employment is 367.3 Bn AED; furthermore tourism industry in 2015 has a boost in its contribution to GDP is 136.4 Bn AED and the total contribution to employment is 546.2 Bn AED, therefore it is considered as one of the most reliable sectors in the Emirates at present. 600 Axis Title 500 400 Contribution to GDP 300 200 Total Contribution to Employment 100 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Axis Title Figure 8: The economic contribution of Travel and Tourism - Nominal prices (in Billion AED) (Source: Computed from World Travel & Tourism Council) 5.3 Sustainable Environment According to Sutton (2014) environmental sustainability is ‘the ability to maintain things or qualities that are valued in the physical environment’; when physical environment stands for physical resources and physical surrounds in a society. For a sustainable environment the maximization of productivity from renewable resources and conservation of nature and natural resources is a mandatory agenda. 5.3.1 Convertible Solar, Tidal and Wind Energy The U.A.E., characterised by strong tides and windstorms and the reception of immense direct sunlight, has the vast possibility to convert these limitless energy source to meet energy demand. Research and expedition in the locale should be promoted tremendously to fit the high demand for clean energy. The research and development in the renewable resources such as photovoltaic, geothermal energy and hydroelectric power reduce carbon emission to alleviate climate change, to gain secure energy supply concerns along with employment creation. The policy makes shall invite public market investment and foreign investment in the segment will open up window towards vast opportunity from side to side with innovative ideas. Recently there has been a huge initiative implemented by U.A.E. government for sustainable energy development through building solar energy dependent buildings where no electricity is 14 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown required. These initiatives will have a very positive impact on the U.A.E.’s future of becoming a sustainable energy user, and will also bring a balance on the sustainable environment. 5.3.2 Zero Waste Technology Zero waste technology is the alternate way to manage the waste by recycling all products without leaving back any waste. Plastics, glass and metals can be recovered after use, reprocessed and reused. But the accumulation of non-recyclable waste is generated through the process, and hence arising it as a challenge for the zero waste technology. The U.A.E. reached far ahead in garbage treatment without landfills, still further moves shall be done to promote ecofriendly products, proper management of e-waste advertisement, and so on. 6 Conclusion This paper has analysed the prospects of a sustainable U.A.E. economy in the spectrum of the current slowdown, while the U.A.E. government has already initiated the steps as per the guidelines of UN sustainable development goals, UNESCO and World Bank. From the analysis it is obvious that the economy faces the cyclical downturn driven by the abrupt decline in oil prices and tight global financial situation. At the same time the economy observes a high balance of payments and hike in exports of non-hydro carbons, a positive symbol for a healthy growth. This economic downturn can be overturned through suitable defensive policies and strategies since the U.A.E. has enormous potential for being a global hub of scientific and social research, education, medicine and tourism for which people mostly sought after today from all over the world, whereas the U.S.A. excels amid the financial debts and turmoil, still holding the world power with importunate innovations. The implications of this paper extend towards the development of a sustainable society and therefore the significance of finding an alternative energy source than hydrocarbons has to be more communicated to the young generation, so as to facilitate and implement extensive research on the same by means of young and innovative idea. In a sustainable economy the continuous cyclic depression from a boom can be well balanced by slow and steady dependence on service sectors and the non-hydrocarbon exports. For a sustainable environment, the applicable research and development should be promoted massively to fit the high demand for clean energy and utilization of convertible natural resources to reduce the carbon emission, to reduce the rapid climatic changes and to gain safe and secure energy supply. The U.A.E. government has already in progress to maximize the use of solar energy and plans to establish solar panels on all the buildings by 2030. Under the directives of HH Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the U.A.E. and Ruler of Dubai, the Dubai Electricity and Water Authority is organizing the first Dubai Solar Show, which will highlight the latest innovations in the solar technologies and will offer a unique B2B platform for the public and private sectors to make deals and build partnerships and to learn about the current and future projects in the region, more importantly for a clean, safe and sustainable earth for generations. The initiatives of great visionaries in the U.A.E. will have a mass impact in future development, are really appreciable and in a short span they could accomplish a stand or even outshine the developed economies of the world. 15 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown Appendix 2011 2012 2013 2014 2015 Current Account Balance 187.1 253.3 262.1 200.6 79.30 Trade Balance (FOB) 391.5 484.7 529.7 480.6 328.30 Total Exports of Hydrocarbon 409.9 440.6 475.2 409.7 234.00 Total Exports of Non-Hydrocarbon 260.3 354.2 382.4 412.8 450 Re Exports 439.1 488.7 516.7 538.8 540.3 Total Exports & Re Exports (FOB) 1,109.2 1,283.5 1,374.3 1,361.3 1224.3 Total Imports (FOB) -717.8 -798.8 -844.6 -880.8 -896.00 Services (NET) -160.6 -176.6 -181.0 -186.5 -145.50 Investment Income (NET) 0.4 1.1 0.7 1.0 6.4 Transfers (NET) -44.2 -56.0 -87.2 -94.4 -110.00 Financial Account -109.1 -145.8 -181.7 -194.6 -37.90 Private Capital 2.9 -30.8 -7.4 28.0 71.80 Overall Balance (BOP in Billion AED) -16.6 36.3 73.1 34.0 55.3 Table 1: The U.A.E. Balance of Payments (in Billion AED) GDP (Billion US$) GDP Growth Rate U.A.E. GDP Growth Rate World 2001 103.3 1.4% 1.97% 2002 109.8 2.43% 2.18% 2003 124.3 8.80% 2.9% 2004 147.8 9.57% 4.46% 2005 180.6 4.86% 3.82% 2006 222.1 9.84% 4.38% 2007 257.9 3.18% 4.31% 2008 315.5 3.19% 1.84% 2009 253.5 -5.24% -1.68% 2010 286 1.64% 4.35% 2011 348.5 5.21% 3.13% 2012 373.4 6.89% 2.48% 2013 387.1 4.32% 2.4% 2014 399.4 4.57% 2.63% 2015 370.2 3.18% 2.47% Table 2: Gross Domestic Product 16 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown Contribution to GDP Total Contribution to Employment 81.5 367.3 2010 90.7 427.4 2011 103.3 405.6 2012 113.8 462.5 2013 120.4 485.1 2014 2015 126.7 136.4 518.3 546.2 2009 Table 3: The economic contribution of Travel and Tourism - Nominal prices (in Billion AED) FDI INFLOW FDI OUTFLOW 2005 10900 3750 2006 12806 10892 2007 14187 14568 2008 13724 15820 2009 4003 2723 2010 8797 2015 2011 7152 2178 2012 8828 2536 2013 9491 8828 2014 10823 9019 2015 10976 9264 Table 4: FDI Flows (in Million $) Health Expenditure (% of GDP) 2001 2.48% 2002 2.72% 2003 2.65% 2004 2.46% 2005 2.32% 2006 2.33% 2007 2.57% 2008 2.93% 2009 4.05% 2010 3.93% 2011 3.70% 2012 3.45% 2013 3.49% 2014 3.64% Table 5: Health Expenditure (% of GDP) 17 The Prospects of Sustainable Development in the U.A.E. Economy in the Spectrum of Global Financial Meltdown References Abeygunawardena, P., Anderson, R., Bell, R.G., Cann, C.W., Cann, M.C. and Day, K.A. (2005). 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Though the concept of KRI is clear and a lot of research work has been done on the same, there seems to be lack of understanding practical development and implementation of KRIs. Given this background, the paper looks at identifying relevant KRIs for the United Arab Emirates banking sector. Keywords Basel loss type, business line, key risk indicator, operational risk, root cause analysis “…. We should not forget that the basic economic function of these regulated entities (banks) is to take risk. If we minimize risk taking in order to reduce failure rates to zero, we will, by definition, have eliminated the purpose of the banking system.” Alan Greenspan, Former President Federal Reserve Board, May 1996 1 Introduction Risk has been and will continue to be an integral part of the banking industry. The economic crises of the 1970s and 1980s forced the Central Bank governors of the G-10 countries to take pro-active measures by which they could safeguard the banks from risk. They established the Basel Committee which gave guidelines on financial supervision for internationally active banks (BIS, 2003). In 1988, the Committee introduced a capital measurement system commonly referred to as the Basel Capital Accord. The Committee came up with three sets of guidelines, Basel I, which was introduced in 1988 and Basel II which was introduced in 2008. Basel III regulations were published in 2013 and are still under implementation in many countries (BIS, 2013). Until recently the belief was that a bank’s exposure involved only two main types of risks, namely, credit risk and market risk. The remaining risk belonged in the category of others risks, operational risk being one of them. Emerging trends, though, have shown that the importance of operational risk has been largely underestimated. The inclusion of operational risk in Basel II, in addition to credit and market risk has highlighted its importance. 21 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector According to the Basel Committee, operational risk is defined as ‘the risk of loss resulting from inadequate or failed internal process, people and system or from external events’ (BIS, 2003). This definition includes legal risk, but excludes strategic and reputational risk. Given the difficulty in measuring operational risk, the Basel Committee identified tools to measure operational risk, one of them being the Key Risk Indicators (KRIs). Key Risk Indicators are metrics that can be used to monitor operational risk. Key Risk indicators can provide information in terms of the level of exposure to a given operational risk event. In other words risk indicators are metrics that are directly related to the various operational risk events identified under a specific risk category. Hence a change in the value of indicator can to a great extent indicate a change in operational risk exposure. Within banks and other financial institutions, there is now an increasing pressure to manage operational risk. Apart from governing guidelines from regulators, this pressure is also due to the increasing sophistication of financial products and systems. Operational risk could be the outcome of risks stemming from people in charge, applied processes, systems in place and external events. The kind of risk that originates from people could stem from management failure or organizational or human resource failure. When it comes to process failure, a breakdown could stem from violating established processes, failures to follow procedures or processes strictly or not having proper policies and procedures. A system risk could also be the outcome of disruption or system failure due to technical or other problems, whose source could be internal or external. External events could include acts of terrorism, disaster, vandalism, natural disaster which can impact the operations of a bank. Operational Risk Management (ORM) has its own elements, as its main goal is to ensure that there is an effective framework and measurement mechanism in place (Figure 1). The framework Figure 1: Operational Risk Management Structure. 22 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector has two main needs to satisfy. It should introduce a mechanism where implementing operational risk policies would be possible bank wide and at the same time it should undertake a process of comprehensive data capturing and measuring mechanism to assess the kind of risk exposure the bank is dealing with. Broadly speaking, Operational Risk Management involves the following steps: • Identification of operational risk • Measurement of operational risk • Monitoring of operational risk • Control of operational risk 2 Literature Review Although there have been many studies and research papers covering the concept of KRIs, not much has been done with regard to their development and implementation. Notable research on the basic concept of KRI has been done by the Institute of Operational Risk (2010) and Branson, Beasley and Hancock (2010). 3 Developing Effective KRIs As mentioned above, KRIs are metrics that give an indication of a possible operational risk loss event. Having said that an unfavorable (could be increase or decrease) movement in KRIs does not necessarily imply that the operational risk event will occur. It is just a warning system that a potential operational risk event could occur. For example, for a restaurant to continue to earn good profit, it is critical to have more customers and reduced cost. Based on research into the structure of the industry, the restaurant understands that for people to walk into the restaurant, it is important for them to be in productive employment. Hence the unemployment rate can be considered to be a KRI for this business. Similarly inflation can be considered as an important KRI as it impacts the cost and so would be the number of customer complaints as they provide feedback on customer satisfaction. When developing an effective set of KRIs it is important to identify relevant metrics that provide useful insights for potential operational risk event. Hence to develop an effective KRI structure we need to understand the organization structure and critical risk events under each operational risk. The Risk Management Group (RMG) of the Basel Committee has come up with eight standardized business types (Figure 2) and seven Operational Risk Loss types (Table 1) so that those who are trying to assess their operational risk know what to focus on and how to work out the structure. 23 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector Figure 2: Basel Business Lines for operational risk (BIS, 2001). EVENT TYPE Internal Fraud External Fraud Employment Practices and Workplace Safety Clients, Products and Business Practices Damage to Physical Assets Business Disruption and System Failures Execution, Delivery and Process Management DEFINITION Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/discriminating events, which involves at least one internal party Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law by a third party Losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims or from diversity/discrimination events Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients or from the nature or design of a product Losses arising from loss or damage to physical assets from natural disaster or other events Losses arising from disruption of business or system failures Losses from failed transaction processing or process management, from relations with trade counterparties and vendors Table 1: Loss event types for operational risk (BIS, 2001) 24 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector To develop KRIs one needs to analyze a risk event that can or could have an impact on the bank and understand the root cause for the event. Based on the root cause one develops an indicator that has or could have possibly predicted the event. For KRIs to be effective they should be in line with or developed based on the root cause of the risk event. With KRIs in place, bank management gets enough time for implementing strategies to mitigate the operational risk or mitigate the loss from the operational risk. Hence instead of having a ‘post-mortem’ approach, KRIs can help bank management to predict the risk event and provide to mitigate or even reverse the event. Movements in indicators provide an indication of whether an organization’s exposure to a particular risk is increasing or decreasing. KRIs are assigned threshold limits or escalation triggers, a breach of which may indicate the requirement of controls or actions on part of management to prevent an operational risk event from occurring. By observing a set of appropriate risk indicators and by checking their actual values and trends against agreed limits / thresholds an organization can evaluate whether the operational risk exposures remain within its ‘appetite’ for risk or exceeds it. Hence the monitoring of risk indicators is an important mechanism by which an organization’s management can gain assurance that it remains within its stated appetite for operational risk (Institute of Operational Risk, 2010). 4 Selecting Risk Indicators Any piece of data that is remotely or strongly related to risk can be considered to be a KRI. However, the challenge is to develop a concise set of KRIs which provide an early signal on the possibility of operational risk. The Institute of Operational Risk in their paper ‘Operational Risk Sound Practice Guidance - Key Risk Indicators,’ published in November 2010, introduced the following four criteria that make a Key Risk Indicator: (a) Relevance Risk indicators should be linked to an organization’s operational risk exposures and provide management with a quantitative measure of current level of exposure and the degree to which such exposures are changing over time. However relevance can change overtime as new risk exposures emerge and existing are controlled or mitigated. Hence KRIs need to be continuously updated to ensure that they continue to be relevant to the organization. (b) Measurable and auditable Anything which is not measurable cannot be a KRI. KRIs are quantitative indicators that must be quantified as an amount, percentage, ratio, number or count and can be compared overtime. Also the data required for the calculation of a KRI must be available or can be generated. Equally important is the requirement that the KRIs should be easy to verify and audit. 25 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector (c) Predictive KRIs can be leading or lagging indicators. Leading indicators are predictive in nature and are derived from metrics that can help to forecast future occurrences. Lagging KRIs are metrics based on historical measures. These help to identify trends in the firm. Of course, given the nature of KRIs, it is preferable to have higher proportion of leading indicators in comparison to lagging indicators. However many indicators are both lagging and leading. For example, the number of customer complaints is a lagging indicator. However it can also be taken as a leading indicator highlighting the problem in the underlying process. (d) Thresholds, limits and escalation triggers and reporting structure KRIs should have a well-defined threshold or limit which when exceeded results in an escalation and implies urgency for action. Further escalation triggers should be established on what actions need to be taken and by whom. For example, KRI customer complaints threshold is let us say 100 in a month. The escalation structure can be as shown in Figure 3 below. Figure 3: Escalation matrix for KRI customer complaints. 5 Methodology and Findings In our research we have focused on developing KRIs for the Banking sector in the U.A.E. We have started with identifying the Key Business Lines as identified by the Basel Committee for operational risk (Figure 2) and further divided this into Business Units. Within the Business Unit 26 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector we have identified the Key Risk and its Root Cause Analysis (RCA) and mapped it to the operational risk event identified by the Basel Committee (Table 1 above). Based on a Root Cause Analysis of the risk event and processes, we have identified relevant KRIs for a bank (Tables 2-12) in the following respective Business Lines/Units: • Retail Banking – Branch Banking/Operations/Retail Lending/Credit Cards • Retail Banking - Internet Banking • Retail Banking - Mobile Banking • Retail Banking - Phone Banking • Commercial Banking - Wholesale Banking/Trade Finance • Asset Management - Wealth Management • Agency Services - Custody Operations • Payment and Settlements - Payment and Settlements • Retail Brokerage - Retail Brokerage • Trading and Sales - Treasure Dealings • Corporate Finance - Corporate Finance BASEL BUSINESS LINE Retail Banking BUSINESS UNIT Branch Banking/Operations/Retail Lending/Credit Cards ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customer BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of complaints received for Branch banking activities Leading Number of customer complaints received that relate to branch service Total number of customer complaints ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customer BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Ratio of customer service staff to total staff Leading Number of customer service staff Total number of branch banking staff ROOT CAUSE ANALYSIS (RCA) Compliance Risk- AML BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud High cash volume in accounts Leading Number of accounts with total cash credited exceeding a certain threshold Total customer account as at period end ROOT CAUSE ANALYSIS (RCA) Dormant Accounts BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud % of inactive customer accounts Leading Number of dormant / inactive accounts as at end of period Total customer accounts at end of period DENOMINATOR ROOT CAUSE ANALYSIS (RCA) Frozen Accounts BASEL LOSS TYPE KRI KRI TYPE NUMERATOR External Fraud Number of frozen customer accounts Lagging Number of customer accounts that are frozen at the end of the period 27 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector ROOT CAUSE ANALYSIS (RCA) Inactive Accounts BASEL LOSS TYPE KRI KRI TYPE NUMERATOR External Fraud Number of reported instances of activation of frozen accounts Lagging Number of reported instances of activation of frozen accounts DENOMINATOR ROOT CAUSE ANALYSIS (RCA) Wrong Selling BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices % of RMs provided training on a certain product Leading Number of RM who have undergone product training Total number of RM ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices % of total customers lost Leading Total number of customers who have closed their account Total customers as at period end ROOT CAUSE ANALYSIS (RCA) Incomplete Documentation BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of accounts opened with incomplete documents Lagging Total number of customer accounts opened with incomplete documents as per policy documents Total number of accounts opened ROOT CAUSE ANALYSIS (RCA) Compliance Risk-AML BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of customers with multiple accounts Lagging Number of customers with more than one deposit account 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management % of customer requests processed after Turn Around Time (TAT) Lagging Number of customer requests processed after TAT Number of customer requests DENOMINATOR ROOT CAUSE ANALYSIS (RCA) Loss Of Secured Stationery BASEL LOSS TYPE KRI KRI TYPE NUMERATOR Internal Fraud Number of reported instances of theft/loss of secured stationery Lagging Number of reported instances of theft/loss of secured stationery ROOT CAUSE ANALYSIS (RCA) Processing Errors Due to Large Volumes BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management % increase in volume (KRI for each significant operation) Leading Increase/decrease in transaction in current year over last year Transactions last year ROOT CAUSE ANALYSIS (RCA) Incorrect Service Charges BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of system bugs reported with respect to customer charges during the month Lagging Number of system bugs reported to IT team relating to customer charges during the month 1 28 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector ROOT CAUSE ANALYSIS (RCA) ATM Thefts, Damages BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Damage to physical assets Number of instances of ATM damages Lagging Number of instances of ATM damages 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of instances of ATM out of cash Leading Number of instances of ATM out of cash 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of instances of short / excess cash dispensed from ATM Lagging Number of instances of short / excess cash dispensed from ATM 1 DENOMINATOR ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR Internal Fraud Number of branches operating without CCTV Lagging Number of branches operating across the network without any CCTV or an inoperative CCTV at period end ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management % of branches with poor audit rating Lagging Number of branches with audit rating below average (poor or ineffective audit rating) for latest audit rating Total Branches operational at period end ROOT CAUSE ANALYSIS (RCA) Cash Shortage at Branch BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Instances of excess / short cash at cash counters Lagging Number of noted instances of excess cash / short cash at cash counter 1 ROOT CAUSE ANALYSIS (RCA) Damage To Assets BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Damage to Assets Number of reported instances of damage to branch assets Lagging Number of reported instances of damage to branch assets 1 ROOT CAUSE ANALYSIS (RCA) Inadequate Collateral Coverage BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Collateral coverage % (KRIs for each significant loan category) Leading Value of collateral Amount of loan ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of loan agreements executed without using standard agreement clauses Leading Number of loan agreements that contain non-standard clauses 1 ROOT CAUSE ANALYSIS (RCA) Default by Customer BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud Percentage of loans that default early Leading Number of loan accounts that default for the first time in the first 90 days. Total loan accounts outstanding for the period 29 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Internal Fraud % of loan applications rejected Leading Total number of retail loan applications that were rejected during the period Total amount of applications processed during the period ROOT CAUSE ANALYSIS (RCA) Inadequate Collateral BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management % of loans disbursed without collateral valuations Lagging Total amount of loans disbursed without performing collateral valuation Total amount of loans disbursed during the period ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management TAT for loan sanctions Lagging Average Turn Around time (TAT) in number of days for loan sanction for all products 1 ROOT CAUSE ANALYSIS (RCA) Default by Customer BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud % of accounts that have not paid first EMI Lagging Loan accounts with default of first EMI payment Total number of loan accounts across all products ROOT CAUSE ANALYSIS (RCA) Wrong Selling BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of employees outperforming sales targets Leading Total number of sales employees who have exceeded their sales target for the period Total sales employee ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices % of customer complaints relating to credit cards Lagging Number of customer complaints relating to credit cards Total number of customer complaints ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of card transactions that are disputed by customers and still open Lagging Number of card transactions that are disputed by customers and still open 1 ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud Number of stolen cards reported Lagging Number of credit cards reported as stolen 1 ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud Number of card undelivered and returned Lagging Number of cards undelivered and returned to the Bank 1 Table 2: KRIs for U.A.E. banks: Retail Banking-Branch Banking/Operations/Retail Lending/Credit Cards 30 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector BASEL BUSINESS LINE Retail Banking BUSINESS UNIT Internet Banking ROOT CAUSE ANALYSIS (RCA) Fraudulent Transfers Over Net Banking BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud Number of customer complaints for fraudulent transfers Lagging Number of fraudulent transfers identified as notified by customer complaints 1 ROOT CAUSE ANALYSIS (RCA) Phishing Attacks BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud Number of phishing attacked reported Lagging Number of phishing attacks reported during the period 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of technical queries received relating to use of net banking Leading Number of technical queries received from customers during the period who want to address technical problems in use of internet 1 Table 3: KRIs for U.A.E. banks: Retail Banking-Internet Banking BASEL BUSINESS LINE Retail Banking BUSINESS UNIT Mobile Banking ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud Number of security incidents reported for mobile banking transactions Lagging Number of security incidents reported for mobile banking transactions 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of mobile banking/sms banking transaction requests not processed within Turn Around Time (TAT) Lagging Number of mobile banking / sms banking transaction requests received but not processed on time Number of requests ROOT CAUSE ANALYSIS (RCA) External Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud Number of customer who have requested for more than --- 3-- mobile PIN resets in last quarter Leading Number of customers who have requested for more than --3--mobile pin reset requests in the last quarter 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Business Disruption and system failure Number of reported instances of mobile banking server down Lagging Number of instances of mobile banking server down for more than ---30 minutes--- 1 Table 4: KRIs for U.A.E. banks: Retail Banking-Mobile Banking 31 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector BASEL BUSINESS LINE Retail Banking BUSINESS UNIT Phone Banking ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR Internal Fraud Number of customer service employees with training hours below ____ Leading Number of customer service employees with training hours below ____ DENOMINATOR 1 ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Internal Fraud Number of instances of password/ PIN resets without complete verification Lagging Number of instances of password/ PIN resets without complete verification as identified by audit of voice recorder 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices % of phone banking customers not served within time Lagging Number of instances of customer wait time exceed ___(5 mins)___for rendering of services Total number of phone banking transactions Table 5: KRIs for U.A.E. banks: Retail Banking-Phone Banking BASEL BUSINESS LINE Commercial Banking BUSINESS UNIT Wholesale Banking/Trade Finance ROOT CAUSE ANALYSIS (RCA) Default by Customer (Bad Quality Loans) BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud % of credit proposals declined Leading Number of credit proposals rejected during the period Total credit proposals submitted for approval during the period ROOT CAUSE ANALYSIS (RCA) Default by Customer (Bad Quality Loans) BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of credit facilities approved based on old financial statements Lagging Number of credit facilities approved based on old financial statements 1 ROOT CAUSE ANALYSIS (RCA) Incomplete Documentation BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of facilities with pending documents outstanding Leading Total number of facilities with any number of pending documents at end of period 1 ROOT CAUSE ANALYSIS (RCA) Credit Concentration BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process management Ratio of Top 3 regions' exposure to total exposure Lagging Total exposure of top three geographic regions Total credit exposure as at end of period 32 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector ROOT CAUSE ANALYSIS (RCA) Credit Concentration BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Exposure to Top 20 accounts as % of Total Loans and Advances Lagging Total exposure of top 20 customers at end of period Total credit exposure as at end of period ROOT CAUSE ANALYSIS (RCA) Collateral Coverage BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Ratio of financial collateral to total exposure Lagging Total financial collateral available at end of period for credit exposures Total credit exposure as at end of period ROOT CAUSE ANALYSIS (RCA) Credit Concentration BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management % of corporate loans to total loans Lagging Total amount of corporate loans outstanding Total amount of all loans outstanding ROOT CAUSE ANALYSIS (RCA) Compliance Risk-AML BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management % loans sanctioned without site visits Lagging Number of loans sanctions for which there was no site visit prior to sanction Total number of new loans sanctioned during the period ROOT CAUSE ANALYSIS (RCA) Wrong Selling BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Employment Practice Number of training days offered to new RM Leading Number of training days offered to new RM during the past 3 months 1 ROOT CAUSE ANALYSIS (RCA) Operational Error BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of reported instances of document verification errors Lagging Number of reported instances of document verification errors 1 ROOT CAUSE ANALYSIS (RCA) Operational Error BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management % of trade finance staff trained on various aspects of Trade Finance processing Lagging Number of trade finance staff with training hours above 100 hours Total staff in Trade Finance Operations ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud Number of reported instances of fraudulent transactions Lagging Number of reported instances of fraudulent transactions 1 Table 6: KRIs for U.A.E. banks: Commercial Banking-Wholesale Banking/Trade Finance 33 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector BASEL BUSINESS LINE Asset Management BUSINESS UNIT Wealth Management ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of accounts opened without supporting risk profile of customer. Leading Number of accounts opened without supporting and signed risk profile of customer obtained after discussing customer's risk appetite 1 ROOT CAUSE ANALYSIS (RCA) Compliance Risk-AML BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of High risk customer Leading Total number of customer accounts existing at end of period that are flagged as high risk categories 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of trades supported by completed risk profile (Trade suitability check) Lagging Number of trades supported by completed risk profile Total trades executed during the period ROOT CAUSE ANALYSIS (RCA) Compliance Risk-AML BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management % of overseas wealth management customers Leading Number of overseas customers for wealth management business Total number of wealth management accounts ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of disputes over performance of advisory activities Lagging Number of customer complaints relating to improper advice given to the customers 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of disputed transactions Lagging Number of disputed transactions with clients and open at end of the period 1 Table 7: KRIs for U.A.E. banks: Asset Management-Wealth Management BASEL BUSINESS LINE Agency Services BUSINESS UNIT Custody Operations ROOT CAUSE ANALYSIS (RCA) Operational Error BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Ratio of errors to total manual transactions Lagging Total number of errors detected during the preceding period Number of manual custody and corporate action transactions processed 34 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector ROOT CAUSE ANALYSIS (RCA) Operational Error BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of Breaches Not Disclosed to Customers within Threshold Lagging Number of breaches not disclosed to customers within threshold 1 ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Number of missed security settlement cycles Lagging Number of days on which settlement was not processed as per the settlement timelines 1 Table 8: KRIs for U.A.E. banks: Agency Services-Custody Operations BASEL BUSINESS LINE Payment and Settlements BUSINESS UNIT Payment and Settlements ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management % of funds transfer requests not processed in time. Lagging Number of funds transfer requests that were not processed on time. Total number of funds transfer requests received. ROOT CAUSE ANALYSIS (RCA) Compliance Risk-AML BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of instances of transfers to countries on the Black List with respect to AML Lagging Number of instances of transfers to countries on the Black List with respect to AML 1 Table 9: KRIs for U.A.E. banks: Payment and Settlements-Payment and Settlements BASEL BUSINESS LINE Retail Brokerage BUSINESS UNIT Retail Brokerage ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Internal Fraud Number of instances of fraudulent activity in customer's brokerage account Lagging Number of instances of fraudulent activity in customer's brokerage account 1 ROOT CAUSE ANALYSIS (RCA) Compliance Risk-AML BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR External Fraud Number of clients without adequate background and reference checks Leading Number of clients without adequate background and reference checks 1 Table 10: KRIs for U.A.E. banks: Retail Brokerage-Retail Brokerage 35 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector BASEL BUSINESS LINE Trading and Sales BUSINESS UNIT Treasury Dealings ROOT CAUSE ANALYSIS (RCA) Unsatisfied Customers BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Instances of customer complaints relating to wrong rates Lagging Instances of customer complaints relating to wrong rates 1 ROOT CAUSE ANALYSIS (RCA) System Downtime BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Business Disruption Total system downtime Lagging Total downtime (hours/min) for all important Treasury systems 1 ROOT CAUSE ANALYSIS (RCA) Limit Breach BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Instances of counterparty limit breach Lagging Number of instances of counterparty limit breach noted during the period 1 DENOMINATOR ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR Internal Fraud Instances of password sharing violations Lagging Number of instances noted for password sharing violations ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Internal Fraud Number of employees, other than Dealers, who have access to Dealing room Leading Number of employees, other than dealers, who have access to dealing room 1 ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Internal Fraud Number of failed trades Lagging Number of failed trades done during the period 1 ROOT CAUSE ANALYSIS (RCA) Limit Breach BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Execution, Delivery and Process Management Total number of limit breach across all limit types and products Lagging Total number of limit breach across all limit types and products 1 ROOT CAUSE ANALYSIS (RCA) Operational Delays BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Business Disruption Total downtime of SWIFT messaging systems during the period Lagging Total downtime of SWIFT messaging systems during the period 1 DENOMINATOR ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR Internal Fraud Number of employees with access to SWIFT payment systems Leading Total number of employees with access to processing SWIFT payment systems 36 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector ROOT CAUSE ANALYSIS (RCA) Fraud BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Internal Fraud Number of employees with excessive leave balances Leading Number of employees who have not taken minimum leave as per HR policies Total number of employees in the treasury Department ROOT CAUSE ANALYSIS (RCA) Wrong Selling BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of customer complaints of having being sold derivative products not suitable for them Lagging Number of customer complaints of having being sold derivative products not suitable for them 1 Table 11: KRIs for U.A.E. banks: Trading and Sales-Treasure Dealings BASEL BUSINESS LINE Corporate Finance BUSINESS UNIT Corporate Finance ROOT CAUSE ANALYSIS (RCA) Wrong Selling BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Client, Product and Business Practices Number of investor complaints relating to wrong selling Lagging Number of investor complaints relating to wrong selling 1 ROOT CAUSE ANALYSIS (RCA) Insider Trading BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Internal Fraud Number of staff with Inappropriate or Unnecessary Access to Proprietary Research Lagging Number of staff with Inappropriate or unnecessary access to proprietary research 1 ROOT CAUSE ANALYSIS (RCA) Insider Trading BASEL LOSS TYPE KRI KRI TYPE NUMERATOR DENOMINATOR Internal Fraud Number of instances of insider trading detected Lagging Number of instances of insider trading detected 1 Table 12: KRIs for U.A.E. banks: Corporate Finance-Corporate Finance 6 Conclusion Quantitative measurement of operational risk is and always has been a challenging area for banks. With the increased importance given to operational risk in recent risk management guidelines, developing and implementing a proper set of KRIs has become critical for banks across the world. Before developing and implementing KRIS, it is important to understand the imperative operational risk factors for a bank and map it to Basel Business Units, processes and risk events. A KRI is an operational risk tool which will be successful only if it is directly mapped to risk. 37 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector A right number of, and properly developed, KRIs, can definitely help bank management in controlling operational risk. Instead of adopting a ‘post-mortem approach,’ KRIs enable management to be proactive with regard to operational risk management and provide them with the ability to understand early signs of operational risk. In this paper, focusing on the structure of the U.A.E. Banking sector, we have created a set of KRIs that can be used by banks for operational risk management. Although this is not an exhaustive list, throughout this paper we have provided the basis on which banks can further build and develop KRIs. 38 Key Risk Indicators (KRIs) for the U.A.E. Banking Sector References Bank for International Settlements (BIS) (2001). Regulatory Treatment of Operational Risk. Working Paper. Basel Committee on Banking Supervision. Bank for International Settlements (BIS) (2003). Sound Practices for the Management and Supervision of Operational Risk. Basel Committee on Banking Supervision. Basel Committee on Banking Supervision. (2006). International Convergence of Capital Measurement and Capital Standards: A Revised Framework. Comprehensive Version. Branson, B.C., Hancock, B.V. and Beasley, M.S. (2010). How Key Risk Indicators Can Sharpen Focus on Emerging Risks. Retrieved from http://www.coso.org/documents/COSOKRIPaperFullFINALforWebPostingDec110_000.pdf Hoffman, D.G. (2002). Managing Operational Risk: 20 Firm Wide Best Practice Strategies. Chicago, USA: Wiley. Institute of Operational Risk (IOR) (2010). Operational Risk Sound Practice Guidance: Key Risk Indicators. Institute of Operational Risk. 39 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective Amit Kumar Sinha & Sonia Singh Abstract Government, central bank and banking sector make tremendous efforts for efficient mobilization of household saving and effective allocation to the growing credit requirement of the economy helps in sustainable development of the country. Still there exists a significant gap between the growth expectations and the ground realities in context of ‘mobilization and utilization of funds’ that support inclusive growth of the country. There is a need of effective tools to bridge the gap and bring in every section of people from all parts whether rural or urban to take part in the mainstream financial activities. An e-wallet or virtual cash wallet as such a tool for making instant payments and other transactions and helps to boost the economy, through a smartphone application, is very effective in emerging economies, where access to the internet and banking opportunities are a privilege, but accessibility to mobile is high. In this paper an attempt is being made to assess the position of e-wallet in an emerging market - taking India as an example - the its growth, the challenges it faces, the new opportunities it presents, and the way forward. Keywords e-wallet, financial inclusion, emerging economies, mobile technology 1 Introduction The Planning Commission of the Government of India is looking forward to achieve a ‘Faster, Sustainable and More Inclusive Growth’ in its approach to the twelfth five year plan (2012-2017). The policies formulated by the Planning Commission clearly encourage country wide access to financial product and services at an affordable cost, especially for the poor and vulnerable groups. This acts as an integral part for promoting sustainable and inclusive growth. It is very difficult to achieve inclusive growth without including the 140+Mn household of rural India under the organized financial system. These people do not have access to the banking and financial services, and as a result, they remain excluded from the horizon of economic development of the country. The primary aim of financial inclusion is to provide financial services to unserved people of the country in a fair, transparent and equitable manner to unlock its growth potential. Financial inclusion should not only be seen as a philanthropic activity or a regulatory compulsion but also as an unexplored opportunity for a business involving a large section of the population. Financial inclusion not only aims to the welfare of the people but also has a significant commercial prudence. Several macroeconomic factors indicate that the basic ingredients for the successful creation of a digital ecosystem are rapidly falling in place, far exceeding the supply side capabilities that support 41 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective the Indian government’s agenda of financial inclusion. For instance, digital banking offers numerous advantages, largely based on the fact that Indian consumers have shown tremendous preference for digital technologies, with growth rates for e-commerce as well as mobile phone adoption far outstripping rates in developed economies. The Reserve Bank of India broadly defines financial inclusion as providing access to a ‘wide range of financial services at a reasonable cost.’ This provision of access to banking services to nearly 47 per cent of the reportedly unbanked population in India has the potential to unfold huge growth opportunities for financial services players. In this context, digital platforms are likely to deliver financial services to both the unbanked and the underbanked population, especially in rural/remote regions, at a low cost, and subsequently increase digital financial access to provide high quality, affordable financial services. By using digital channels, transaction costs could be lower than those incurred through traditional channels by as much as 90 per cent, thereby bringing down break even costs, as banking becomes much less reliant. Financial inclusion is the delivery of sustainable banking services at an affordable cost to the vast sections of underprivileged and low income groups. Though there are few people who are enjoying all kinds of services from savings to net banking, still in India around 40% of people lack access to even basic financial services like savings, credit and insurance facilities. So an inclusive sector should not only serve the bankable clients, but also integrate the un-bankable clients by making them bankable. Out of 19.9 crore households in India, only 6.82 crore households have access to banking services. As far as rural areas are concerned, out of 13.83 crore rural households in India, only 4.16 crore rural households have access to basic banking services. In urban areas, only 49.52% of urban households have access to banking services. Both the Government of India and the Reserve Bank of India (RBI) have taken various steps to increase banking penetration in the country, nationalization of banks, establishment of RRBs, introduction of SHG and strategy of one person one account for accessing financial markets. Globally, more than 2.5 billion adults do not have a formal bank account, most of them in developing economies. Low levels of financial inclusion represent a barrier to socio-economic development in developing countries. The e-wallet can be a game changer for the poor and an enabler for financial inclusion in emerging economies. The e-wallet has attracted more interest from the developing countries than from developed countries. The e-wallet adoption is currently lower in more developed countries, where most people have bank accounts and the mobile phone is evolving as just another payment channel for existing financial products and services and for customers with bank accounts. In emerging economies, however, the e-wallet is being used strategically to enable people without bank accounts to carry out financial transactions. For the World Bank, financial inclusion, or broad access to financial services, is the absence of price or non-price barriers in the use of financial services. In developing countries, the financial infrastructure is not well developed, with a limited number of payment instruments and a larger unbanked population, who find access to financial services very costly. This results in a large percentage of the population operating on a cash only basis and outside the formal banking system. 42 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective The economic welfare and growth of a nation depends upon the accessibility of people to financial product and services. Efficiently mobilizing their household saving and allocating them effectively to the growing credit requirement of the economy helps in the sustainable development of the country. The Indian Government, RBI and the banking sector are making tremendous efforts to bring every section of the country into the mainstream financial system. Still, there exists a significant gap between the growth expectations and the ground realities in the context of ‘mobilization and utilization of funds’ that support inclusive growth of the country. There is also a significant disparity among the people of rural and urban area in availing the services of the financial system. There is a need for effective tools to bridge the gap and bring in every section of people from all parts whether rural or urban to take part in the mainstream financial activities. Mobile technology can act as a tool to develop a platform which helps us to extend the financial services in remote areas. Technology intervention helps banks to reduce their cost, to increase customer reachability and in better management of business risk. The e-wallet can be a good platform to penetrate the financial services. 2 e-Wallet: A Conceptual Background An e-wallet is a virtual cash wallet for making instant payments and other transactions, through a smartphone application. Not only does the e-wallet offer benefits to users by allowing them to access financial accounts on the move, but it also gives a boost to businesses through the development of digital commerce and banking. The e-wallet, especially the prepaid feature, is providing very effective in emerging economies such as India, where access to the internet and banking opportunities are a privilege, but accessibility to mobile is high. Figure 1: Evolution of the e-wallet (KPMG India, 2015). 43 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective With the emergence of e-commerce and online purchases, the form required for the payment system also required to change, forcing it to go digital. An indicative progress path is shown in Figure 1 (KPMG India, 2015). Thus we migrated from cash payments (which required us to carry our leather /cloth wallet loaded with cash at all times that made it theft prone) to plastic card payments (debit / credit card based system which avoided the use of carrying liquid cash and gave us the freedom to withdraw money / make payments or transfers or remittances from all locations across the globe where the card could be machine-read) and now to contactless payments made over digital channels, either from dematerialized cards held on digital wallets or in the cloud, or from new digital payment mechanisms. Since the scenario is still evolving a wide variety of names are used interchanging for such transactions such as e-money, digital money, micro-payments etc. The terminology as well as the technology for operation of the wallet is still evolving. Standardization and business model issues need to be resolved through partnership between mobile operators, banks, and retailers, paving the way for strong adoption. In this paper the attempt is made to assess the position of e-wallet in an emerging market - taking India as an example - the growth it is making, the challenges it faces, the new opportunities it presents, and the way forward. 3 Operational Mechanism Under mobile or electronic wallet, the individual pre-loads cash in the e-wallet and use it to make payments or transfers. Loading of money is done either electronically using a computer / mobile by debiting from a credit card or bank account or physically by handing over cash at a local merchant (Point of Sale, POS) or at the ATM counters. What is required is an internet connection and a mobile /computer. With the technology in place, mobile based operations through e-wallets have become a mode for financial inclusion. There are charges for use of mobile / e-wallets, which include registration fees and cash loading charges (above a limit) towards payment companies / service providers. These charges are at times higher than those for internet banking. However, the main advantage with the e-wallet is that while shopping online, the customer stands to benefit from the concessions/ offers from the payment companies in the form of cash-backs and so on. 4 Literature Review In recent years, banks have played an important role in meeting the credit needs of people. Moreover, the digitalization of financial services has paved the way for financial inclusion in emerging economies for sustainable development. In the past few studies have attempted to analyze the role of commercial banks in financial inclusion and digitalization of financial services for sustainable development. As the developed economies are poised to transition many smart mobile phone users from the cash-based payment and other forms of digital payments such as the credit/debit card systems to smartphone payment, the emerging economies of Sub-Saharan Africa (SSA) are also finding ways to use their second and third generations (2G and 3G) mobile phones for financial activities 44 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective (Bold et al, 2012; Donovan, 2012, Ehrbeck et al, 2012; Holmes, 2011; Hughes & Lonie, 2007; Jack & Suri, 2011; The Economist, 2012). The literature informs that basic mobile phones have been adopted in Sub-Saharan Africa (SSA) and that they could help to transform the region’s emerging markets (Bishop et al, 1999; ADB, 2003; Elijah & Ogunlade, 2006; Srivastava, 2008; Economist, 2012; Etim, 2012). The ubiquity of the mobile phone in the region can bring significant changes, sustainable growth as well as economic opportunities for the large unbanked population. An important strategy is the collaboration by banks and Mobile Network Operators (MNOs) to deliver mobile phone-based money transfer services (Ehrbeck, 2012; Jenkins, 2008). Leeladhar (2006) reported that in India, presently, financial inclusion is confined to ensure the access of saving accounts for all but internationally it has wider perspective. There could be a multiple level of financial inclusion. It depends upon the level of involvement of customer with financial product and services. Having a current account/savings account on its own, is not regarded as an accurate indicator of financial inclusion. Rangarajan (1996) identified three to four major factors which would have an impact over the future banking operation including progressive de-regulation of interest rates, a diversified competitive market place, market determined exchange rate mechanism and technological progress. He suggested that the banks provide credit to agriculture and allied sectors as provision of credit to high tech agriculture which is almost equal to providing credit to the industry. For Beck & De la Torre (2006) financial inclusion should signify access to a range of different financial services, the percentage of people in a given area with access to a bank account is the typical measuring stick for breadth of financial services. Karmarkar (1997) highlighted the role of Micro financing (SHGs) on the rural credit delivery system in the state of Orissa with example of successful projects in the different parts of the state. He has suggested for active participation of banks and other development agencies to promote micro financing in large scale to accelerate the pace of rural development. Technology can play a critical role in realizing the objective of sustainable development through financial inclusion and it can be very well understood from a keynote address by Dr. K. C. Chakrabarty, Deputy Governor, RBI: “We have encouraged banks to leverage technology to attain greater reach and penetration while keeping the cost of providing financial services to the minimum. While we remain technology neutral, we require banks to seamlessly integrate whatever technology they choose, with their CBS architecture” (Chakrabarty, 2013). A technology framework helps the banks to extent their services to underprivileged people and at the same time helps them to meet their business objective. With the help of ICT in financial inclusion and financial literacy, we will able to make a long lasting impact on economic development of the country (Indian Banks Association, 2008). There is also a need to motivate the new financially included customer towards the usage of various financial products and services, which is very clear by C.J. Punnathara in his analysis based on latest progress and trends in banking industry, that, for nurturing greater equity and to accelerate economic development, early gains in inclusion should 45 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective be transformed into financial deepening as well as that the newly empowered bank customers should be enabled to extend their financial activity into an array of products, leading to all round economic development. Pallab and Munish (2013) analyzed the benefits of online banking from the viewpoint of customers and banking sector in general: A. Benefits for Customers In general, banking customers have been significantly affected by the advent of the internet banking revolution: • A banking customer’s account is extremely accessible with an online account. • Through mobile banking the customer can operate his account remotely from his office or home. The need for going to bank in person for every single banking activity is dispensed with. • Mobile banking lends an added advantage towards payment of utility bills. It eliminates the need to stand in long queues for the purpose of bill payment. • Most, if not all, services that are usually available from the local bank can be found on a single handset. • Sharp growth in credit card/debit card usage can be majorly attributed to mbanking. A customer can shop globally without any need for carrying paper currency with him. • By the medium of m-banking, banks are available 24x7 and are just a finger click away. B. Benefits for the Banking Sector In addition to banking customers, the growth of the e-banking infrastructure in general, and mobile banking in particular has proved to be extremely beneficial to banks and overall bank organizations on account of the following: • The concept of mobile banking has immensely helped the banks in putting a tab over their specific overheads and operating cost. • The rise of mobile banking has made the banks more competitive. It resulted in opening of better prospects and avenues for banking operations. • The mobile banking has ensured transparency of transactions and facilitated towards removing the documentation requirements to a major extent, since majority of records under an e-banking set up are maintained electronically. • The reach and delivery capabilities of mobile -enabled banks, proves to be significantly better than the network of physical bank branches. 5 Objectives of the Study • • • • 46 To assess the e-wallet as a tool for financial inclusion in India. To study the current status of e-wallet in India. To study the challenges and opportunities for e-wallet in India. To study the way forward for e-wallet in India. The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective 6 Perspective of Financial Inclusion in India Financial inclusion is not only about extending financial services to excluded people, but involves providing wide range of financial services, including credit facility, insurance, and remittance products. The Indian Government led approaches to meet financial inclusion primarily deals with expanding branches, opening special institution like Rural Regional Banks (RRBs) and cooperative banks and setting up the mandates credit target. Its success was mixed, and it was showing diminishing returns. In rural India only 33% of population is included in the formal financial system and situation becomes more tough in case of lower income group where only 26% of people form a part of financial development in the country (Figure 2), while 41% of urban India population and 34% of lower income group in urban India is participating in the financial system, which is comparatively better than the rural India. So, there is a need to boost financial inclusion programs especially in rural area. Figure 2: Details of accounts at a formal institution in rural and urban area (Bansal, 2014). 7 Digitization Trends and Opportunities for Mobile Enabled Banking Mobile phones are likely to lead digital growth in India, considering the expected level of penetration. Innovations that use mobile penetration and payments banks to their advantage are likely to further financial inclusion. The extensive reach of mobile phones in the country (920 million subscribers) offers an innovative low-cost channel to extend the reach of banking and payment services. (Refer to the graphs in Figures 3, 4, 5, and 6 below for user statistics). 47 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective Figure 3: Number of Mobile Internet users (in millions) (CISCO, 2015) Figure 4: Smartphone Penetration (%) (CISCO, 2015) Figure 5: India’s Mobile Banking Opportunity (CISCO, 2015) 48 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective Figure 6: Mobile Banking User Forecast (%) (CISCO, 2015) 8 e-Wallet 8.1 The Growing Popularity of e-Wallets Telecom service providers leverage their wide-ranging geographical reach and prevailing networks to provide mobile-based financial services to the unbanked and those living in the remote geographical locations. And today, mobile money is gradually gaining traction in emerging markets, including the BRIC (Brazil, Russia, India, and China) and CIVETS (Columbia, Indonesia, Vietnam, Egypt, Turkey, and South Africa) economies. If this potential is appropriately tapped, monetary transactions and mobile phones are likely to become inseparable. An e-wallet is a prepaid payment instrument or application on a mobile device that enables financial transactions for products or services between two parties. e-Wallets work via a simple model, wherein the amount is loaded first into the wallet account, and then the transactions are enabled without the need for cash or cards. All that is required to load money into the wallet account is the mobile number, mobile money identification (MMID) number, bank name, and account number. The e-wallet can be loaded with credit, either directly by the user or through an authorized retailer, after necessary authentication with the MMID. For customers with no bank accounts, cash deposits with authorized dealers can be used to start a wallet. 8.2 Uses of e-Wallets In this paper, we have considered India-centric scenarios to elucidate the uses of e-wallets in emerging markets. As a substitute for the traditional wallet, an e-wallet holds huge possibilities in India as an instrument of financial inclusion. Most mobile banking services are available through e-wallets, including: 49 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective • • • • • • Instant money transfers to any bank Online shopping and merchant payments Payments for booking train tickets Utility bill payments ̶ electricity, gas, mobile, direct-to-home (DTH) television Broadband top-ups Payments for booking cabs and other services online or via mobile devices Although online banking is available around the clock, users need an internet connection to access it. But for e-wallets, users do not need internet access. Transactions can be carried out through the mobile network, short message service (SMS), unstructured supplementary service data (USSD), or smartphone applications. 8.3 Types of e-Wallets To combat theft, simplify your finances, avoid being the "check-writing guy" in line at the store and maybe even ward off trips to the chiropractor, perhaps it's time for a wallet upgrade. For that, you might consider the digital wallet. Before we go any further, understand that the term digital wallet is a blanket descriptor for a range of technologies that let you perform many tasks. In general, though, a digital wallet (also sometimes called an e-wallet) is a transformation in the way you pay for things. Many digital wallet services work through apps on your smart phone. At the supermarket, for instance, you might simply tap your phone to a compatible check-out register to pay instantly. For others, all you need to use them is something you know, such as your mobile phone number and a PIN (personal identification number). No matter what form it takes, a digital wallet is based on encryption software that substitutes for your old, analogue wallet during monetary transactions. You benefit from the protection and convenience. Merchants benefit because they're more protected against fraud and they sell more products, faster. A smart phone digital wallet will help you pay for stuff, but it will also store your concert tickets, bus and subway passes and gift cards. Retailers will reward your loyalty by offering instant freebies, discounts and coupons. Your digital wallet might even unlock the doors to your house. A digital wallet could alter the way you organize your finances and your life in general. We can lump the types of digital wallets into two broad categories: client-side and server-side. Within both categories are wallets that function only with specific vendors (either online or offline) and others that will work with just about any merchant. Client-side wallets generally refer to those maintained by you, the end user. You download and install a program and then enter all of your pertinent payment and shipping information, all of which is stored on your own personal computer. Then, when you decide to check out at a compatible Web site, your wallet's software completes most of the basic information so you don't have to. Suddenly, your impulsive online shopping sprees get much faster and much, much more expensive. Contrast that with serverside wallets; for example, Visa's V.me digital wallet. Instead of storing data to your own hard drive, all of your wallet data is stored and maintained by Visa on the company's secure computers. 50 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective Currently, e-wallets available in India can be categorized as semi-closed and open-loop wallets. ewallets can be issued by either banks or by non-banking entities, certified by the Reserve Bank of India (RBI). Wallets issued by banks enjoy more benefits in terms of higher fund transfer limits and cash withdrawals through Automated Teller Machines (ATMs). When issued by banks that adhere to Know Your Customer (KYC) guidelines, an e-wallet allows the customer to withdraw cash through agents, retailers, and ATMs. This is referred to as an open-loop wallet. Semi-closed wallets are provided by independent players that are mobile-operator agnostic, but do not provide cash withdrawal options. For example, some mobile operators offer a combination of both semi-closed and open wallets ̶ with limited KYC processes for semi-closed and complete KYC for open-loop wallets. While most bank-led open wallet providers charge a fee to activate an e-wallet, there is generally no charge for opening a semi-closed e-wallet. Most mobile subscribers already use SMS packs or data packs, regardless of the type of e-wallet. This means the cost of SMS or data is already integrated into the plans bought by most users. For bank-issued wallets, there could be other charges based on the nature of transactions. On the other hand, semi-closed wallet providers charge only for loading the amount into the wallet, and there are no transaction charges for transfers or payments. 8.4 e-Wallet: Current Outlook and Market Drivers For e-wallets to truly succeed there needs to be a strong surge in demand with substantial growth in the mobile subscriber base. It also requires a modern mindset among users, pushing them to think beyond the conventional cash systems and recognize the advantages of the expanding payment options. On the supply side, there needs to be good infrastructural support and onboarding of merchants to offer services seamlessly. 8.5 Inclusion of Low-Income Groups with e-Wallet For a good e-wallet system to thrive on a mass scale in India, it is important to get the low-income group to start thinking about alternative currency forms. This can be done by educating and including them in e-wallet marketing campaigns. However, challenges in offering services to the low-income group include the lack of credit history, the country's nascent Credit Bureau infrastructure and national ID system, and limited penetration of formal banking and payment systems across rural India. For India to meet market expectations as an emerging global player and ensure sustainable market growth, developing a financial ecosystem inclusive of the rural population will be critical. Partnerships between leading mobile operators and financial institutions are already being formed to meet this objective. These partnerships can help provide m-payment transactions that support basic banking services for India's rural population, currently an extremely large and underserved population of more than 800 million. 8.6 Improving e-Wallet Acceptance The key to ensuring the growth and acceptance of the e-wallet is to not only get the customer an e-wallet, but to sustain the account and drive its daily use for transactions. The e-wallet can serve 51 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective as the main instrument that meshes the banking industry and its customers. Every bankable individual must have an open wallet issued by a bank to realize the true potential of e-wallets. 9 Challenges: Overcoming Technology and Other Challenges The e-wallet can be used to a great advantage in domestic and international remittances. For ewallets to become popular, certain conditions need to prevail. These include increased acceptance, good infrastructure, cash-out options, and hassle-free user experience, as well as interoperability among different wallet providers. The lack of proper compliance standards causes a number of inconsistencies in the types of ewallet technology. A user's e-wallet technology and a retailer's point-of-sales device must be compatible for a successful transaction. In case of a mismatch between consumer's e-wallet technology and retailer's point-of-sales device, the consumer will be unable to use his or her ewallet. From the hardware compatibility perspective, variations in e-wallets also need varying components. Some need a point-of-sale device that is compatible with the mobile device in its vicinity. At the moment, retailers are interested in Near Field communication (NFC) technology which supports contactless payments. Several retailers also use Quick Response (QR) codes that retail employees scan to complete payment transactions. Some payment systems take the opposite approach and require customers to scan a QR code that the merchant produces. The presence of all these methods creates inconsistency and confusion in the market. These technological issues need to be ironed out to create a more seamless way of using the e-wallet. Another challenge is the lack of acceptance, with only a small network of merchants performing e-wallet transactions, low limits on transaction values, and the impossibility of cash withdrawals with a semi-closed wallet. The RBI at present does not allow MNOs to offer cash out from ewallets. Hence, users can leverage the mobile money only to buy products or services, thereby limiting its usage. If the RBI were to allow e-wallet cash-out, it could create high traction in peerto-peer (P2P) transactions. 10 The Way Forward: Pushing for an Inclusive and More Efficient Financial Ecosystem The ultimate success of the e-wallet will lie in enabling over-the-counter payments across domestic and international points of sale. This will take time to catch on as it needs merchant acceptance and a large network base of stores with the know-how to help customers use the wallets. Once the user base increases, offline merchants will also start adopting mobile payments, leading to an increase in offline acceptance. Mobile banking has the potential of becoming one of the biggest drivers of electronic transactions in India more so than plastic money or net-banking. The substantial mobile user base and percentage of unbanked population in emerging economies create a compelling proposition for 52 The Role of e-Wallets in Financial Inclusion in Emerging Economies: An Indian Perspective FIs and mobile operators to partner for e-wallet services. In addition, the symbiotic relationship between prepaid transactions and mobile phones is a good entry point for the rural population into the formal financial system, and supports adoption of the e-wallet on a mass scale. 11 Conclusion e-commerce has galvanized the Indian and global trade sphere. Technology has given both wings and hands to entrepreneurs to develop and implement their concepts in the market. The concept of e-commerce, that is, commercial transactions conducted electronically on the internet, has evolved beyond greatest minds reach. It is a sphere where everyone needs to step in to survive and not to increase market share only. The lines segregating businesses are evaporating trading corporates, airlines, financial institutions, and so on, are all providing payment gateways. Every mobile company is collaborating or going on their own to develop applications which can connect to its users and can meet their requirements. Various innovative applications have helped the companies retain its customer interest which has resulted in their cash registers ringing. The e-wallet is a one such luscious opportunity, which has emerged as a viable and easy payment option. e-commerce companies are looking at e-wallets as an important channel partner/ instrument in making the online experience an easy and hassle free experience. From M-Pesa to Ola money the convenience and safety along with benefits this is what the ewallets have bought to the consumer and freedom to service provider to add features to the a very competitive market. For urban consumers the e-wallet has been a boon to avail buffet of features and benefits. 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The Economist, April 28, 55. 55 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. Muhamad M.S. Jumaa Abstract The research reported in this paper, aimed to study the impact of e-banking on bank profitability applied to the banks that are performing in the U.A.E. Financial statements of some well-known and reputed banks of the U.A.E. (ADIB, UNB, NBAD, Mashreq Bank and Emirates NBD) were chosen for the accounting period 2009 to 2013. The research analysed the financial ratios like ROA, ROE, and Profit Margin of the banks to find whether there is any improvement in their revenues. A survey was conducted in these five banks in order to find out whether the customers use the e-banking services. The findings of the research showed a positive relationship between e-banking and profitability of banks, but also it was noticed that banking systems are not highly secured. Banks have to improve in this area as it will lead to more profitability and high return from using ebanking and avoiding any kind of fraudulent activity. More research is needed on this topic for the Middle East, as literally resources are very limited. To improve and to increase the usage of e-banking, banks have to minimize fees and reduce charges for all services provided through online, such as, money transfer from one bank to another, withdrawals from ATMs of different banks and usage of debit and credit cards. Keywords e-banking, profitability, financial statement, ROA, ROE, NPM 1 Introduction The world is progressing rapidly day by day. It seems impossible now to even imagine the world without the internet. The world is getting more involved and communicating is easier than ever before. Globalization is an important and significant key to this massive change over the decades. One of the vast implementations by the banking sector are e-banking facilities. The introduction of electronic banking has revolutionized the entire banking operating system. ebanking has redefined the ways the bank used to operate in the previous days. Nowadays, technology is the main contributor to the success of any business and is also considered as one of the core competencies of the organization. e-banking is an indispensable part of e-business; it is a primary source in exchanging various business transactions. It has enabled to simplify the banking procedures for the customers as well as for the bank too in many ways. The cost of banks has been reduced whereas the income has increased to a certain extent. This adaptation has reduced the communication gap between the bank and the customer, and has enriched the relation between them. e-banking has eliminated various types of distractions to some extent, for example, the availability of 57 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. information, the distance between the bank and customer, the time taken for processing a transaction, and so on. Banking through the internet may help in achieving higher efficiency, reduction in the cost of paper-based operations, better control of operation, as well as, to decrease labour intensive methods, by replacing automated process and procedures, thus increasing productivity and profitability for banks. Based on the rising need, e-banking is accessible in many ways within a very short time span. The various types of e-banking services provided by banks include: mobile banks, pin paid, automated teller machine (ATM), PC banking, electronic funds transfer, online statements, account transfer, online payments of bills, fax bank, and so on. The most advanced feature which internet banking provides is importing various data into personal accounting software. Nowadays traditional banking has adopted internet banking to some extent which has made banking much easier and convenient for the customers. Online banking has also provided platforms to support account aggregation that allows customers to monitor their accounts in one place in their main bank or with various institutions. Pyramid, a division of the Economist Intelligence Unit, found that the development or growth of e-banking in the U.A.E. is faster than that of the U.S.A., the U.A.E.'s e-banking adoption rate is 21% that of the U.S.A. is 17%. According to a report published by the U.A.E.-based Albassera Project the e-banking adoption rate of U.A.E. at above 40% which is one of the highest in the world. This research project is based on the impact of e-banking on bank profitability. It is limited to banks only in the U.A.E., namely, Emirates NBD, ADIB, Mashreq Bank and UNB, which were considered and studied thoroughly. 2 Literature Review e-banking is considered as the automated delivery of new and traditional banking products and services which are directly accessed by customers by electronic, interactive communication medium (Nsouli and Schaechter 2002). Here, e-banking is defined as an automated way which is modern and not similar to how traditional banking used to serve customers in a more practical approach, but one in which they can directly interact and manage many aspects of banking through the electronic online medium. There are two e-banking approaches suggested by Chhabilal, K. et al (2015), the Dial-in approach and the Internet approach. In the Dial-in approach the user needs to have a specific finance software by which they can do all the process offline and also connect to the bank only for communications and transactions (Chhabilal, K. et al, 2015). e-banking approaches include the Dial-in approach in which users will have a software where the process will happen offline, and the connection with the bank will be for transaction purposes. In the Internet approach, customers of a particular bank can directly log on in their bank website online and then proceed to the area or work they want to do regarding their account (Chhabilal, K., 2015). The importance of the internet to users banking needs relates to the advantages. These benefit the users of the technology in question. According to Tornaztky and Klein (1982) internet banking will be useful 58 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. to attract or make those users be at ease who are interested in technology and all the advantages and ease it brings and if banking is integrated with technology it will be a positive point for those people who are interested in using online services. The financial institutions must do far more to build sustainability into new strategies (Cowe, 2012). Financial institutions for their own sustainability, they have to introduce new strategies which will help their objectives, bring new ideas or increase customer satisfaction. So to have a stable future in the market and industry, the banking sector has to bring in new developments and new strategies to reach the customers which in turn will also benefit the bank itself in terms of profits and reputation. This is why e-banking if it is implemented and encouraged will bring a new interactive way for banking customers to meet their needs and also have a better option to banking. 2.1 e-Banking in the U.A.E. Many of the banks in the U.A.E. have e-banking, which provides many online services for the user. For example, a user can access his/her account at any place and anytime and also avail some other banking services. The benefits of e-banking are usually advertised so that more people make use of online banking which benefits both the parties in terms of fast and reliable service. Emirates NBD, ADIB, Mashreq Bank and UNB along with others are some of the banks that have online services available to their customers. This was recorded in one of the reports posted in Gulf News relating to the internet banking usage in the U.A.E. which is increasing (Bitar, 2016). HSBC mobile service users grew by 500 per cent in 2012. There was a massive increase in HSBC U.A.E. users in mobile services for banking. This enabled the users to be more involved in the banking services (Bitar, 2016). Since people are getting many of the banking services online and also some banking services that were to be done in the bank. Banks can now take off that load of users getting those services. That will increase the profits for banks as they can reduce some of the extra staff or those that work overtime as the customer load would be reduced if many of the services can be accessed online. e-banking is driven hugely by predicting the minimization of operation cost and maximization of operation revenue suggested by Simpson (2002). A study by Furst, Lang and Nolle (2002) showed that federally chartered U.S.A. banks had higher ROE by using the Internet-only banks that do have a physical structure (click-and-mortar business model). They also observed the elements of internet banking adoption and examined that more profitable banks implement internet banking after 1998 but still that doesn’t consider them as the first movers. According to a study conducted by Jayewardena and Foley (2000), internet banking leads to cost reduction and efficiency gains for banks but still very few banks are using it and only a slight more than half a million customers are using internet banking in the U.K. 59 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. 3 Research Objective The primary objective of this study is to find whether there is any relationship between ebanking and the bank profitability in the U.A.E. Profitability is calculated by banks using ratios like return on assets (ROA), return on equity (ROE) and profit margin. Data is also collected from the banking segments from the selected banks. A survey was also been conducted in these five banks in order to find out whether the customers use the e-banking services. 4 Research Hypothesis The following hypothesis was formed as the objective of this study: ”there is a positive relationship between e-banking and bank profitability.” 5 Research Methodology and Design This research was based on quantitative and qualitative research methods. The primary data were collected through a survey, and the secondary data from information that was made available and taken from the selected banks financial statements. It is a correlation study between two variables, e-banking and profitability. According to previous research, the most commonly used measure of bank performance is evaluated by the level of bank profits. 1 The data were collected from the financial reports from the operation segments sections, in which the banks operating income is calculated through various types of banking provided by these banks (such as corporate banking, retail banking, treasury banking, private banking and so on). A survey has also been conducted in these five banks in order to know whether the customers use the e-banking services. Thus, this paper is reporting on a descriptive study in which the statistical information is shown by percentages, figures and tables to establish relationships, facilitate understanding of analyses and ensure easy interpretation. One limitation of the study was that the research sample was limited to a few banks only. If more banks were included the results would have been more precise. Data were analysed using Microsoft Excel whereas if software like SPSS was used more detailed and informative results could have been obtained. 5.1 Dependent and independent variables The bank profitability was the dependent variable for this study. Profitability is the state or condition of yielding a financial profit or gain. It is often measured by price to earnings ratio. For profitability to qualify as the dependent variable for this study, it needs to be measured and to be manipulated by the independent variable. The independent variables of this study were the Return on Assets, Return on Equity, and Profit Margin. These independent variables may be the In previous research on bank performance evaluation a frequently used indicator is bank profits as a ratio of total assets. This is seen in papers by Demirguc-Kunt and Huizinga (1999) as well as by Quispe-Agnoli and Whisler (2006). 1 60 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. determinants that influence dependent variable, for example, how effectively these independent variables affect Profitability (dependent variable). This study identified these variables that are more dominant than others in assessing the Profitability of e-banking in banks. 5.2 Profitability ratios The relation was studied using some profitability ratios like Profit Margin, Return on Assets (ROA), and Return on Equity (ROE) and so on. The data were collected from the financial statements of the banks for a five year period (2009-2013). Profitability ratios are a set of financial ratios that are used to assess a firm’s ability to generate earnings in comparison to its expenses and other costs incurred during a particular accounting period. The higher value of the profitability ratios indicated that the company is doing well. 6 Results and Discussion The results obtained from the questionnaire answered by the selected bank managers are analysed using graphs. The survey consisted of eight (8) questions which helped us to know whether e-banking improve bank profitability, each bank manager was given a questionnaire. On asking the importance of e-banking system as a new delivery channel, four out of five banks considered it as vital were as one bank said that it was essential rather than vital (Table 1). Importance of e-Banking 4 2 0 1 2 2 4 Table 1: Bank responses on the importance of e-banking The banks provided e-banking services like internet banking, telephone banking and so on. But other e-banking services were also provided by ADIB like SMS banking and e-statements and epayments by Emirates NBD (Table 2). e-banking services 6 4 2 0 ATM banking Telephone banking Mobile banking Internet banking Electronic Cards Other eBanking services Other services were also provided like SMS banking by ADIB and e-statement and e-payments by Emirates NBD Table 2: e-banking services 61 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. These banks used online advertisements (80%) like marketing through television and radio, through its employees, to aware and inform their customers about the e-banking services (Table 3). The services which the banks provided through ATMs are shown in Table 4. Marketing of e-banking 5 4 3 2 1 0 Through bank officials Advertisement in Television and Print Media Radio Advertisement On line Advertisement Through their employers Table 3: Marketing of e-banking ATM Services 6 5 4 3 2 1 0 Withdraw of Deposit of Requesting Paying any Check bank Order Transfer of cash cash and cheque book utility bills statement cheque book funds cheque Other Services Table 4: Services provided through ATMs Bank Incentives Giving technological knowledge to customers with seminars Giving them guarantee of security and privacy Demonstrating on how to use services to them Keep on reminding customers through written… Contacting every customer personality Intensive advertisement Incentives to e-Banking users Make them cheaper by reducing charges and fees 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Table 5: Bank incentives to e-banking users The selected banks used many methods to encourage the users of e-banking. 80% of these banks ensured its customers giving security and privacy in order to encourage more users to use 62 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. e-banking services whereas 60% of the banks attracted customers by offering incentives to ebanking users (Table 5). Bank challenges adopting e-Banking 5 4 3 2 1 0 Strongly Agree Agree A B Neutral C D E F Disagree G H J I Strongly Disagree K L M N A The cost of adopting is very high B Traditional banking still remain the best option for our clients C The services are simply too expensive for the lower and consumer D No difference in profitability as compared to branch banking E There is technological illiteracy among bankers F Many banks fear because there are no proper laws and regulations regarding e-banking G Many banks fear risk management challenges like reputation risk, operational and capital adequacy risk. H Security concerns is the most discouraging factor in using e-banking because customer feel insecure as they do not now where electronic transaction pass and whom they meet J Most of the customers do not know how to use and are not aware of some e-banking services provided by their banks. I e-banking services generally do not have privacy of customer's information. K Most of the customers prefer face to face banking L Most of customer's banks are providing few e-banking services and some have not yet adopted e-banking services M Bankers charge high fees on using e-banking services. N Customers fear using e-banking because electronic crimes are arising greatly. Table 6: Challenges for banks adopting e-banking The bankers agreed that cost is a challenge faced by these banks adopting e-banking whereas 20% felt that it is neutral, and 40% disagreed with the challenge that traditional banking still remained the best option. This shows that customers are shifting to e-banking as it is easier and convenient. 40% of the banks think that lower income consumers find the e-banking services too expensive to use. There is a profitability difference between e-banking and branch banking, 60% bankers felt that e-banking is contributing to the bank profitability (Table 6, including other challenges too). The bankers strongly agreed (100%) that it is important to adopt e-banking because of its faster speed and more prestigious way than that of traditional ways whereas 60% were neutral about its adoption cost. 40% of the bankers responded that e-banking is more profitable than traditional banking (Table 7). 63 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. Bankers Opinion on e-Banking 6 5 4 3 2 1 0 Strongly Agree Agree Neutral a b c d Disagree e Strongly Disagree f a e-banking services are generally faster than traditional banking which helps customers to avoid long queue in banking halls. b There is high degree of convenience in e-banking as you can access the banking services from any where c e-banking services are more profitable than traditional banking services. d e-banking services are generally cheaper than traditional banking at the branch as the cost of providing them is less. e Using e-banking service is more prestigious than queuing at the bank halls f e-banking may help in avoiding many risks like robbery in physical handling of large amount of cash. Table 7: Bankers opinion of e-banking Bankers strongly agreed (80%) that ATMs are the best and more convenient way for them to reach the customers, and 60% of the banks strongly agreed that the ATMs are increasing due to the demand by the customers (Table 8). Bankers opinion of ATMs 5 4 3 2 1 0 Strongly Agree Agree Neutral Disagree It is easy to install the system It is not expensive among others It is easy to provide services to clients Convenient to many clients Strongly Disagree Most of clients demand it Table 8: Bankers opinion of ATMs As mentioned earlier, another way to show whether there is a relation between e-banking and profitability of banks is calculated by profitability ratios. The relation was studied using some profitability ratios such as, Profit Margin, Return on Assets (ROA), and Return on Equity (ROE). 64 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. The chart below (Figure 1) represents the ROE ratios of the studied banks in U.A.E. Return on equity ratio or ROE for Emirates NBD in the year 2009 was highest 10.4% whereas in the year 2010 there was a major downfall 6.93% but in the year 2011-2013 the %ROE was fluctuating; later in 2013, there was an increase by 0.81%. Mashreq Bank had the lowest ROE 6.72% in the year 2011 compared to the previous years (8.98% & 6.75%) whereas, Mashreq Bank was able to improve their efficiency and managed to increase it to 12.44% in 2013. NBAD had the highest ratio among the banks studied. In the year 2010, the ratio was the highest 15.72% and the least ratio 13.65% noted was in 2013. ADIB had the least ratios among all. Overall, UNB was continuously stable without any major changes. The highest return on their equity 2.57% they could attain was in 2009 however, in the next consecutive years there was a drastic fall. Return of Equity (ROE) 18 16 14 12 Emirates NBD 10 Mashreq 8 NBAD 6 UNB 4 ADIB 2 0 2009 2010 2011 2012 2013 Figure 1: Return on Equity ratio (2009-2013) The graph in Figure 2 represents the ROA of the selected banks during five particular years. Emirates NBD having had a ROA ratio of 1.19% in 2009 and continued to fluctuate from time to time. It seems that the management were finding it difficult to manage the efficiency of their assets because they declined to 0.95% in 2013. Mashreq Bank had a quite stable ROA ratio. With 1.12% in 2009, it continued to increase the efficiency of its assets by a slightly slower increment of 0.88% throughout the five years. In 2013, Mashreq Bank had a return of 2.09% on its assets which shows that it was improving the management of its assets. NBAD’s ROA was doing quite well in these five years. The ratio changed with a less margin of 0.21% during 2009 and 2010, having had the highest ratio in 2010 of 1.72%, continued to decrease by a very small margin. UNB was able to increase its return on assets by 0.47% through these five years. In 2009, UNB had 1.52% and reached to almost 2% in 2013. ADIB was able to improve its return from 0.12% in 2009 to 1.55% in 2011. These three years seem very important for ADIB to maintain a stable return. But it started to decline by 0.16% in 2012. 65 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. 2.5 Return on Assets (ROA) 2 1.5 Emirates NBD 1 Mashreq NBAD 0.5 UNB ADIB 0 2009 2010 2011 2012 2013 Figure 2: Return on Assets ratio (2009-2013 Net Operating Income is the annual income after deducting all the expenses incurred from the revenue produced from the services or products. Emirates NBD was able to generate 2.37% operating profit in 2009, which slowly reduced to 2.12% in 2012. It must have been due to decline in operating income and increase in operating expense which led to a decline in the percentage of operating profit. In 2013, the operating revenue increased and which also led to an increase in the net operating income by 0.14%. Mashreq Bank showed highest operating profit in 2009 and a slightly decline to 2.91% in 2012 (Figure 3). Net Bank Operating Income 4 3.5 3 Emirates NBD 2.5 Mashreq 2 NBAD 1.5 UNB 1 ADIB 0.5 0 2009 2010 2011 2012 2013 Figure 3: Net Banking Operating Income (2009-2013) It managed to increase its operating income and a small increment of 3.11 in 2013. NBAD with highest net banking operating income of 2.36% in 2010 which shows that they are able to 66 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. generate enough operating revenue from its services and controlling its operating expense to certain extent. After 2010, NBAD faces a declining net banking operating income ratio. With the least ratio in 2013 NBAD was able to generate only 1.89% of operating income. UNB showed a positive increment in its net operating income from 1.94% in 2009 to 2.69% in 2013. UNB was able to control its operating expense and increase its operating revenue. ABID had the lowest net banking operating profit of 1.64% in 2009 and produced operating income reaching 2.74% for two years. It started to decline to 2.02% in 2013 (Figure 3). Net Profit Margin is the percentage of revenue after deducting operating expense, interest, tax and dividends. It is the finally profit which belongs to the organization (Figure 4). Emirates NBD had the highest percentage of net profit margin of 31% in 2009 and declined to 27.47% in 2013. Mashreq Bank was holding 21.4% of net profit margin in 2009 and continued to grow and improve its margin to 39% in 2013. NBAD showed a strong percentage of Profit Margin. With a highest percentage of 51% in 2010 indicated that the bank was generating revenue from its operation and controlling its expense. The percentage continued to fluctuate from year to year but was able to maintain it in 2013 with 50.36%. UNB had a good margin with 54.64% in 2009 and declined to 51.84% in 2012, again increased to 54.41% in 2013. ADIB was able to increase its net profit margin throughout these five years. It had the highest percentage of 31.77% in 2013. Net Profit Margin 60 50 40 Emirates NBD Mashreq 30 NBAD UNB 20 ADIB 10 0 2009 2010 2011 2012 2013 Figure 4: Net Profit Margin (2009-2013) Figure 5 graph below represents the consumer or retail banking segment of the selected banks. It relates the profitability ratio to another indicator which will enhance the results of this study, hat is the operating income generated from the various type of banking segments in the selected banks. All these banks have various types of banking like corporate banking, consumer banking, Islamic banking, treasury banking, and so on. Our main focus though will be Consumer Banking, because this segment of banking includes the banking offered to the consumers, with services such as ATMs, loans, online banking, payment processing, internet banking, and so on. 67 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. Operating Income from Consumer Banking Segment 6,000,000 5,000,000 Emirates NBD 4,000,000 Mashreq 3,000,000 NBAD UNB 2,000,000 ADIB 1,000,000 0 2009 2010 2011 2012 2013 Figure 5: Operating Income from Consumer Banking (2009-2013) Upon collecting the data from the financial reports, the data showed that the operating income increased in the Emirates NBD for those five years as a result of providing the most attractive offers to their customers. Some of these services were insurance, credit cards, increasing the branches and ATMs, loans, and so on. Mashreq Bank had its highest operating income in 2009 and 2010 and declined from 2011 at a sharp rate. The data showed that Mashreq Bank was able to attract the consumers because the operating income started to increase. NBAD and ADIB also faced a growth in their consumer banking continuously in those five years. In 2009, UNB had the lowest operating income from the consumer banking but it started to increase at a moderate rate from 2010 to 2013. IndustryAverage Ratio 45.00 40.00 35.00 ROE 30.00 ROA 25.00 20.00 Net BankOperating Income 15.00 10.00 Net Profit Margin 5.00 0.00 2009 2010 2011 2012 2013 Figure 6: Industry Average Ratios (2009-2013) Figure 6 graph, represents the average industry ratios during 2009-2013. In order to analyse the ratio it is important to compare them with the industry ratio because it the only way to study the strength and performance of the banks. Ratios which meet the average industry ratio means 68 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. they are performing very well. Findings from the research showed that the introduction of information technology into banking operations in the U.A.E. improved the quality of banking profitability. Our hypothesis stated that there is a positive relationship between e-banking and bank profitability. This can be proved by the increase in the operating income of the banks in retail banking segments. As well as after calculating the profitability ratios of the selected banks, the ratios showed the Net Profit Margin, ROE and ROA increases with the expansion of total assets especially in NBAD and UNB; Net Bank Operating Income fluctuated from time to time, which was due to the unstable operating revenue whereas the operating expenses in spite of no increment in operating revenue. The net profit margin was above the industry average ratio which means that they were performing really very well with introducing new offers in the retail segment of their banking operations. Other banks, such as Emirates NBD, Mashreq Bank and ADIB, although they did not meet the industry average ratio, basically due to the unstable figure of the net income, still the ratios have been improving overall in all the banks from 2009 to 2013. 5 Conclusion e-banking can be considered an incredible development in the banking sector. e-banking is altering the banking industry, having the major effects on banking associations. Banking is now no longer limited to the subdivisions where one has to go to the branch in person, to withdraw cash or request a statement of accounts or deposit a cheque. e-banking is a borderless element allowing banking at any place and any time. This facilitates us with all the capacities and numerous favorable options contrasted with traditional banking services. It has not only benefitted customers but the banks also. It is a cost-effective approach as it have reduced the administrative costs and the paperwork related to the transactions. Also, after analysing the results the hypothesis seems to be true. The results show that there is a positive relationship between e-banking and profitability of banks. 6 Recommendations During our research, we noticed that the banking system is not highly secured, so banks have to improve all security systems in order to gain the clients trust and satisfy their customers which will lead to more profitability and high return from using e-banking and avoiding any kind of fraudulent activity. Literature resources based on this topic in the Middle East are very limited; this can be solved by conducting more studies in this area. In a way to improve and to increase the usage of e-banking, banks have to minimize fees and reduce charges for all services provided through online such as money transfer from one bank to another, withdrawals from ATMs of different banks and usage of debit and credit cards. The survey shows that there is less awareness of the procedures among the customers. Therefore, it is recommended that banks should educate their customers by providing seminars and other events to increase the awareness about e-banking services. 69 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. Appendix QUESTIONNAIRE 1 Overall, what do you think about e-banking as a new system of delivering banking services? a) Vital b) Essential c) Desirable d) Cannot say e)Any other (Please specify) 2. Which of the above e-banking facilities are provided by your bank? (Tick one or more) a) ATM banking b) Telephone banking c) Mobile banking d) Internet banking e) Electronic cards 3. How do you inform your customers about e-banking services you provide? (Tick one or more) a) Through bank officials b) Print Media c) Television and Radio d) On line Advertisement e) Through their employers f) Any other (Please specify) 4. The services offered through ATM in your bank (Tick one or more) a) Withdraw of cash b) Deposit of cash and cheque c) Balance check d) Requesting cheque book e) Paying any utility bills f) Check bank statement g) Order cheque book h) Transfer of funds 5. What are approaches you use to encourage your bank clients to use e-banking? (Tick one or more) a) Make them cheaper by reducing charges and fees b) Special promotions and offers to E-banking users c) Advertisement d) Communicating every customer personal e) Keep on reminding customers through messages (SMSs) f) Representing on how to use services to them g) Providing customers with security and privacy h) Providing technological knowledge to customers through seminars 6. What are the challenges facing the adoption of e-banking? Please rate the following accordingly (Tick one only of Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree for each of the following statements) • The cost of adopting is very high • Traditional banking still remain the best option for our clients • The services are simply too expensive for the lower and consumer • No difference in profitability as compared to branch banking There is technological illiteracy among bankers Many banks terror because there are no proper laws and regulations regarding e-banking Many banks fear risk management challenges like reputation risk, operational and capital adequacy risk. Security concerns is the most discouraging factor in using e-banking because customer feel insecure as they do not now where electronic transaction pass and whom they meet • Most of the customers do not know how to use and are not aware of some e-banking services provided by their banks. • • • • • e-banking services generally do not have privacy of customer's information. • Most of the customers prefer face to face banking • Most of customer's banks are providing few e-banking services and some have not yet adopted E-banking services • Bankers charge high fees on using e-banking services. • Customers fear using e-banking because electronic crimes are arising greatly. 7. According to you, why adopting e-banking services is important? (Tick one only of Strongly Agree, Agree, Neutral, Disagree, Strongly Disagree for each of the following statements) • e-banking services are faster than traditional • There is high degree of convenience in e-banking • e-banking services are more profitable than traditional banking services. • Services via e-banking are usually cheaper than traditional banking at the branch due to the cost of providing them is less. • Using e-banking service is more admired than line up at the bank halls • e-banking help in evading many risks like theft in physical handling of large amount of cash. 8. Rate the reasons that you think to use ATM as a media of providing services to customers? (Tick one only) • It is easy to install the system • It is not expensive among others • It is easy to provide services to customer • Convenient to many clients • Most of customers demand it 70 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. Vital Essential Desirable Cannot say Total Responses 4 1 0 0 5 % 80% 20% 0% 0% 100% Responses 5 4 ATM banking Telephone banking Mobile banking Table 1: Bank responses on the importance of e-banking 5 Internet banking 5 Electronic Cards 5 Other e-banking services 2 Other services were also provided like SMS banking by ABID and E-statement and E-payments by Emirates NBD Table 2: e-banking services Through bank officials Advertisement in Print Media Television and Radio Advertisement On line Advertisement Through their employers Responses 3 3 2 4 1 Table 3: Marketing of e-banking % 60% 60% 40% 80% 20% Responses % Withdraw of cash 5 100% Deposit of cash and cheque 4 80% Requesting cheque book 1 20% Paying any utility bills 3 60% Check bank statement 4 80% Order cheque book 0 0% Transfer of funds 2 40% Other Services 2 40% ABID-Make charity payments, changing the PIN, CCDMs, providing payments to Etisalat, AADC,SEWA, DEWA, ADDC, Emirates NBD-inquiries on accounts, loans and cards Table 4: Services provided through ATMs Make them cheaper by reducing charges and fees Incentives to e-banking users Intensive advertisement Contacting every customer personality Keep on reminding customers through written communication Demonstrating on how to use services to them Giving them guarantee of security and privacy Giving the technological knowledge to customers through seminars Total Respondents Responses 1 3 0 2 3 0 4 0 5 % 20% 60% 0% 40% 60% 0% 80% 0% Table 5: Bank incentives to e-banking users 71 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. Strongly Agree 1 Agree Neutral Disagree 3 1 0 Strongly Disagree 0 Traditional banking still remain the best option for our clients 0 0 3 2 0 The services are simply too expensive for the lower and consumer 0 2 2 1 0 No difference in profitability as compared to branch banking 0 0 4 1 0 There is technological illiteracy among bankers 0 3 0 1 1 Many banks fear because there are no proper laws and regulations regarding e-banking 0 3 1 1 0 Many banks fear risk management challenges like reputation risk, operational and capital adequacy risk. 2 3 0 0 0 Security concerns is the most discouraging factor in using ebanking because customer feel insecure as they do not now where electronic transaction pass and whom they meet Most of the customers do not know how to use and are not aware of some e-banking services provided by their banks. 2 3 0 0 0 4 1 0 0 0 e-banking services generally do not have privacy of customer's information. 0 0 2 3 0 Most of the customers prefer face to face banking 0 1 2 2 0 Most of customer's banks are providing few e-banking services and some have not yet adopted e-banking services 2 1 2 0 0 Bankers charge high fees on using e-banking services. 0 0 4 1 0 Customers fear using e-banking because electronic crimes are arising greatly. 1 2 2 0 0 The cost of adopting is very high Table 6: Bank challenges adopting e-banking Strongly Agree Agree Neutral Disagree Strongly Disagree e-banking services are generally faster than traditional banking which helps customers to avoid long queue in banking halls. 5 0 0 0 0 There is high degree of convenience in e-banking as you can access the banking services from any where 4 1 0 0 0 e-banking services are more profitable than traditional banking services. 1 0 4 0 0 e-banking services are generally cheaper than traditional banking at the branch as the cost of providing them is less. 0 2 3 0 0 Using e-banking service is more prestigious than queuing at the bank halls 0 5 0 0 0 e-banking may help in avoiding many risks like robbery in physical handling of large amount of cash. 2 3 0 0 0 Table 7: Bankers opinion of e-banking 72 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. Strongly Agree 1 2 2 4 3 It is easy to install the system It is not expensive among others It is easy to provide services to clients Convenient to many clients Most of clients demand it Agree 1 1 3 1 2 Neutral 3 1 0 0 0 Disagree 0 1 0 0 0 Strongly Disagree 0 0 0 0 0 Table 8: Bankers opinion of ATMs ROE ROA 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Emirates NBD 10.46 6.93 7.1 7 7.81 Emirates NBD 1.19 0.82 0.87 0.83 0.95 Mashreq Bank 8.99 6.76 6.73 9.92 12.45 Mashreq Bank 1.13 0.99 1.09 1.8 2.1 NBAD 14.78 15.27 14.05 13.92 13.65 NBAD 1.53 1.74 1.45 1.44 1.46 UNB 10.85 11.32 11.48 11.35 11.4 UNB 1.53 1.65 1.81 1.84 2 ADIB 2.58 0.2 0.17 0.17 0.14 ADIB 0.12 1.36 1.55 1.4 1.41 Net Profit Margin Net Bank Operating Income 2009 2010 2011 2012 2013 2.57 2.33 2.26 2.12 2.26 2.62 2.92 3.12 2.08 1.93 1.9 2009 2010 2011 2012 2013 Emirates NBD 30.97 24.06 25.01 25.01 27.47 Emirates NBD Mashreq Bank 21.45 19.07 22.23 33.56 38.9 Mashreq Bank 3.37 3.09 2.29 2.36 NBAD 47.19 51.31 47.05 49.98 50.36 NBAD UNB 54.65 52.84 52.87 51.87 54.41 UNB 1.94 2.25 2.56 2.64 2.69 31.77 ADIB 1.65 2.75 2.75 2.34 2.02 ADIB 2.23 24.85 26.79 27.44 Operating Income from Consumer Banking 2009 2010 2011 2012 2013 Emirates NBD 3,386,887 3,322,146 3,917,855 4,376,237 5,024,173 Mashreq Bank 1,566,673 1,566,673 1,179,566 1,096,332 1,285,962 NBAD 1,511,537 1,760,529 1,855,907 1,957,538 2,109,502 UNB 724,552 950,037 1,104,164 1,116,479 1,153,623 ADIB 1,546,456 2,016,538 2,191,820 2,280,058 2,572,241 Industry Average Ratio 2009 2010 2011 2012 2013 ROE 9.53 8.09 7.91 8.47 9.09 ROA 1.10 1.31 1.36 1.46 1.58 Net Bank Operating Income 2.36 2.56 2.45 2.39 2.40 Net Profit Margin 31.30 34.43 34.79 37.56 40.58 Formula Used Return on Equity = Net Income /Shareholder's Equity Return on Assets = Net Income/Total Assets Net Banking Operating Income = Operating Income- Operating Expenses/Total Assets Net Profit Margin = Net Income/Revenue 73 The Impact of e-Banking on the Profitability of Banks Operating in the U.A.E. 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